November 17, 2010
TG-957
Deputy Secretary Neal Wolin
Remarks to the London Stock Exchange
“A New Financial Framework: Dodd-Frank’s
Contribution to Global Reform”
Remarks as Prepared for Delivery
Thank you for the opportunity to be here today and to speak about the critical topic of financial regulatory reform.
Two years ago, the global economy was deep in crisis.
In the United States, our financial system stood on the verge of collapse, not because of one gap or breakdown in our system, but because of many.
Firms took on risks they did not fully understand.
In Washington, regulators did not make full use of the authority they had to protect consumers and limit excessive risk.
Loopholes allowed large parts of the financial industry to operate without oversight, transparency, or restraint.
Policymakers were too slow to fix a broken system.
Around the world, other countries faced similar predicaments. And given the inter-connectedness of the global financial system, soon the entire global economy was at risk in ways we had never before experienced.
Over the past two years the global community has worked together to restore stability and growth. But from the start we also knew – in the United States and around the world – that we had an obligation to fix the flaws in our financial systems that had helped trigger this crisis.
In July, when President Obama signed into law the Dodd-Frank Act -- the most significant financial reforms since the 1930s – the United States took a tremendous step forward.
The Act builds a stronger financial system by addressing major gaps and weaknesses in regulation. It puts in place buffers and safeguards to reduce the chance that another generation will go through a crisis of similar magnitude. It protects taxpayers from bailouts. It brings fairness and transparency to consumers of financial services. And it lays the foundation for a financial system that is pro-investment and pro-growth.
Today, I would like to highlight some of the most important elements of our new framework, share our progress so far in implementing that framework, and set our work in the context of the broader global effort at financial regulatory reform.
We are hard at work on the construction of a system that is more robust, more transparent and more resilient.
First the Dodd-Frank Act creates a framework and provides new tools to identify and manage systemic risk in a way that we could not do before.
Before the Dodd-Frank Act, there was no single government entity charged with monitoring and responding to risk across the financial system. Gaps and inconsistencies led to regulatory arbitrage, and some of the largest, most interconnected firms were able to escape meaningful supervision.
The new law creates the Financial Stability Oversight Council, chaired by the Secretary of the Treasury, and composed of the heads of the financial regulatory agencies. The Council is charged with identifying risks to financial stability, responding to any emerging threats in the system and promoting market discipline. The Act also provides the Council with the responsibility to decide which nonbank financial institutions and financial market utilities will be designated as systemically important and to recommend what heightened prudential standards should be applied to those firms – with a view not only to the safety of specific institutions, but, critically, to the stability of the entire system.
In order to constrain systemic risk effectively, the Council and its members must be able to monitor systemic risk effectively. Doing that requires improvements in financial reporting and analytical capacity in the regulatory community.
That is why, alongside establishing the Council, the Dodd-Frank Act also established the Office of Financial Research.
The OFR was created to address the critical need of regulators, policymakers, and industry for data that are more standardized, more useful, and more reliable. The OFR's capacity to organize and analyze data will help the Council make more informed decisions about potential threats to the financial system.
Given the global nature of this crisis, it is no surprise that this ability to look beyond the safety of individual firms or markets to the health of the broader financial system is one of the key areas of reform called for by the international regulatory community. At the London Summit in April 2009, the G-20 Leaders agreed that their authorities should be able to identify and take account of macro-prudential risks across the financial system to limit the build-up of systemic risk. Last week, the G-20 Leaders called on the Financial Stability Board, the IMF and the Bank for International Settlements to further develop frameworks for a new set of policy tools in this area.
Second, the Act requires that regulators impose substantially stronger prudential standards.
Risk-based capital, leverage, and liquidity standards will be tougher for all firms, providing a more reliable buffer against both firm-specific failures and systemic shocks. And firms that are bigger and more complex will have to hold more capital than smaller and less complex firms, requiring them to internalize risks they impose on the system by virtue of their size and complexity.
The Dodd-Frank Act imposes a new mandatory stress-testing regime on the largest bank holding companies and designated non-bank firms. It requires them to establish "living wills," laying out a credible plan for breakup and wind-down in the event of severe financial distress. Regulators are now able to require all financial firms, including holding companies, to take swift action to remedy declines in capital levels and other critical measures of financial health. And, as the Volcker Rule requires, there will be restrictions on certain risky activities by banks, such as investing in hedge funds and proprietary trading, as well as on the excessive growth by acquisition of the very largest financial firms.
We are also seeing movement on stronger prudential standards in the international community. Inadequate capital was at the core of the crisis, and we strongly support the work done by the Basel Committee to improve the quality and quantity of capital, impose a leverage ratio, and develop tougher liquidity standards. We are committed to continue our implementation of Basel II, apply the tougher capital requirements on banks' trading books known as Basel 2.5, and implement the new, tougher Basel III standards on time.
We also welcome the work done by the Financial Stability Board to strengthen the intensity of supervision of the systemically important financial institutions – something the Dodd-Frank Act also requires us to do.
Third, the Act establishes a comprehensive regulatory framework for the derivatives markets – the source of so much risk and uncertainty in the recent crisis.
Standardized derivatives will be centrally cleared and all derivatives will be reported to trade repositories. Standardized over-the-counter derivatives will also be traded on exchanges or electronic trading platforms to increase transparency and efficiency of these markets.
Regulators will impose strong prudential standards, including capital and margin requirements, and strong business conduct standards on over-the-counter derivative dealers and all other major OTC market participants. And the SEC and CFTC now have full enforcement authority – to monitor markets, set position limits and take action against manipulation and abuse. Through a narrowly tailored end-user exemption, the Act ensures that commercial firms will be able to hedge their risks effectively and efficiently.
Derivatives should reduce risk, not magnify it. They should be a force for stability, not contagion. By bringing the derivatives markets out of the shadows, the new law benefits every business that uses derivatives to manage real risks.
These are global markets that should have open, transparent, and prudentially sound infrastructure supporting them. That is why the G-20 committed to this and our regulators are working through CPSS and IOSCO to make sure we all agree to robust prudential and information sharing requirements. We commend the European Commission's proposals on central clearing. We look forward to continued collaboration on their future work on derivatives trading and market abuse--ensuring that we have open, transparent and non-discriminatory regimes, without geographic mandates, on both sides of the Atlantic.
The fourth key element of the Dodd-Frank Act is putting an end to the problem of "Too Big to Fail" in the United States. The Act gives the U.S. government the authority to shut down and break apart large non-bank financial firms whose imminent failure might threaten the broader system. Modelled on pre-existing authority to wind down failed banks, this resolution authority closes a gap with respect to non-bank financial firms that severely limited the federal government's options during the crisis, for example with AIG or Lehman.
It allows the U.S. government to wind down a failing financial firm wiping out shareholders, firing culpable management, and allowing creditors to take losses while stabilizing the financial system.
Any losses that cannot be covered through sales of the firm's assets will be recouped from the largest financial institutions through an ex-post assessment.
As a result, no firm will be insulated from the consequences of its actions. No firm will be protected from failure. No firm will benefit from the perception that taxpayers will be there to break their fall. The Act makes absolutely clear that taxpayers will never be asked to bear the costs of a financial firm's failure.
We strongly believe that other countries need to develop the types of tools we have long had for orderly resolution for banks– and now non-banks. Last week, G-20 Leaders reaffirmed their committed to implement national resolution systems with the powers and tools to ensure that all financial institutions can be resolved safely, quickly and without destabilizing the financial system or exposing the taxpayers to the risk of loss. These national systems are essential if regulators are to develop effective cross-border resolution plans.
Fifth, the Act enhances the federal government's ability to monitor the insurance sector and coordinate and develop federal policy on major domestic and international insurance issues. The crisis highlighted the lack of expertise within our federal government regarding the insurance industry. In response, the Act establishes the Federal Insurance Office which will provide the U.S. Government – for the first time -- dedicated expertise regarding the insurance industry.
The Office will monitor for problems or gaps in insurance regulation that can contribute to a systemic crisis in the insurance industry or the financial system; gather data and information on the industry and insurers; and coordinate policy in the insurance sector.
The Act does not provide the Federal Insurance Office with general supervisory or regulatory authority over the business of insurance. The States remain the functional regulators. Through the Office, however, the federal government will work toward modernizing and improving our system of insurance regulation.
With the Office, Treasury is now better able to work with other nations to increase international cooperation on insurance regulation, enhancing our collective efforts in addressing risks posed to the financial system. The Federal Insurance Office is in the process of becoming a member of the International Association of Insurance Supervisors where it will represent the United States. The Secretary of the Treasury, together with the United States Trade Representative, is now empowered to negotiate certain international agreements regarding prudential insurance measures and the Office will assist the Secretary. We anticipate that the Federal Insurance Office will be actively involved, for example, in working with the representatives of other countries on reinsurance collateral and U.S. equivalence under Solvency II.
Sixth, the Act establishes a single agency dedicated to consumer financial protection.
The Bureau of Consumer Financial Protection, is an independent entity within the Federal Reserve, with a clear mission: to promote transparency and consumer choice, and to prevent abusive and deceptive practices.
The CFPB will consolidate seven agencies' existing functions for supervising the largest banking institutions for compliance with consumer financial protection laws.
And it will supervise the consumer financial services activities of many non-bank financial firms that sell consumer financial services – an entirely new federal function.
This is an area that hasn't received a lot of international attention to date. However, just this past weekend, the G-20 leaders agreed to ask the FSB, the OECD, and others to explore options for advancing consumer financial protection through informed choice that includes disclosure, transparency, and education and protection from fraud and abuse. We look forward to working with them.
Now, the Act does much more. But each of these is a critical element: a focus on systemic risk; heightened prudential standards; comprehensive regulation of derivatives; an end to "too big to fail;" the creation of a Federal Insurance Office; and robust consumer protection.
Enactment of the legislation was, of course, not the end of the financial reform effort. We have now begun the difficult and complex process of implementation.
We have made significant progress in the months since enactment. Wherever possible, we are providing clarity to the public and to the markets. We are moving as quickly and as carefully as we can. But the task we face cannot be achieved overnight. We have to write new rules in some of the most complex areas of finance; consolidate authority spread across multiple agencies; set up new institutions for addressing systemic risks and for consumer protection; and negotiate with countries around the world.
We have made important progress creating the new regulatory bodies established under the Act. These institutions are at the heart of the Dodd-Frank Act – the Financial Stability Oversight Council, the Office of Financial Research, and the Consumer Financial Protection Bureau. And I would like to take a few moments to update you on our progress standing them up.
First, the Financial Stability Oversight Council. As Chair, Treasury has moved quickly to convene the Council earlier this month, ahead of the date required by the Act. At this first meeting, Council members engaged on important substantive issues. They requested public input on the criteria the Council should use to designate systemically important nonbank financial companies for Federal Reserve supervision. And they requested public comment on the Council's study on the Volcker Rule's limitations on proprietary trading at certain financial institutions.
More broadly members released an integrated roadmap for implementing the Dodd-Frank Act that reflects the priorities of the various regulatory agencies. And they adopted bylaws and a transparency policy.
On November 23, the Council is scheduled to have its second meeting. I expect that the Council will continue its work on systemic risk and discuss the criteria for designating systemic non-bank financial institutions and financial market utilities. The Council is also making progress standing up its operations, including budget, staffing, and organizational structure.
The Council's success in carrying out these critical functions will depend on its ability to act in a collaborative manner. While each member agency is responsible for a specific part of the financial sector or for certain aspects of its functioning, the Act holds the Council and its members collectively accountable for maintaining stability across the financial system. Accordingly, the Council's approach preserves the independence of regulators to fulfil their individual responsibilities while maximizing the coordination required for the Council to achieve its broader mission of financial stability.
Here in Europe, national governments and the European Union are setting up institutions with similar mandates for monitoring systemic risks. We look forward to cooperating with them in the future, particularly through the Financial Stability Board and the Basel Committee, to share best practices as we develop approaches to macro-prudential supervision.
The second institution Treasury is creating is the Office of Financial Research. The OFR is working with regulators and industry, laying the groundwork to standardize financial reporting and develop reference data that will identify and describe financial contracts and institutions. Data standardization will provide for more consistent and complete reporting, making the data available to decision makers easier to obtain, digest, and utilize.
Over the coming weeks and months, the OFR will begin to define a set of standards for reporting of financial transaction and position data. The OFR will collaborate with the financial industry, data experts, and regulators to develop an approach to standardization that works for everyone.
We are mindful that the OFR must not duplicate existing government data collection efforts or impose unnecessary burdens. That is why we are working with the regulators to catalogue carefully the data they already collect to ensure the OFR relies on their data whenever possible. The OFR is also exploring ways in which it could act as a central warehouse of data for the regulatory community, which could generate efficiencies and interagency cooperation.
For example, new reporting requirements in the Dodd-Frank Act, which are consistent with reforms supported by the G-20, will make possible a comprehensive cataloging of derivatives in order to track their redistribution of risk through the system. Data standards will make it easier for individual firms to assess their own risks and will improve discipline by giving market participants better information on what individual firms are doing.
Beyond establishing standards, the OFR is also required to develop and publish key reference data that will describe financial institutions and contracts. Regulators and supervisors, as well as private firms and investors, rely on such reference data to analyze risk. The OFR is beginning the effort to put all of this in place.
Now the true measure of success will be in how it facilitates more robust and sophisticated analysis of the financial system, both for the government and the private sector. This is critical for our Council as well as its international counterparts. We look forward to identifying and addressing key data gaps.
The third institution is the Consumer Financial Protection Bureau. Treasury has set up an implementation team focused on establishing key functions of the bureau such as research and supervision of bank and non-bank financial institutions, and building the CFPB's supporting infrastructure.
The Secretary has designated July 21, 2011, as the date on which the CFPB will assume existing authorities of seven federal agencies, and we have made substantial progress preparing the CFPB to incorporate staff and assume authorities from those agencies.
Let me conclude by expressing the U.S. government's deep appreciation for the meaningful effort our international friends here and around the world have been making to implement fundamental financial reform.
There is no doubt that the regulatory frameworks that many countries had in place ahead of this crisis simply did not work. They failed to prevent a historic global recession that has cost us all dearly. They must be fixed. And in Washington we have tried to lead by example.
But this is a challenge for all of us to meet. In the wake of the severe, globally synchronized financial crisis, we must develop the most globally convergent financial protections the world has ever attempted. So as we protect against future crisis; and as we promote lasting global growth; we need to act in a coordinated fashion.
That doesn't mean that our strategies will be identical. They shouldn't be. While global convergence is essential in areas such as capital and derivatives regulation, in other areas the reforms we seek may be best served by different nations pursuing different means. A specific implementation approach that works for the United States may not work for the United Kingdom.
But we should never forget that we all have the same goal. We need a level playing field. And by implementing new standards; by ending too big to fail; by enhancing global regulation; and by establishing stronger international coordination to prevent future crises, we will improve the soundness and resilience of the global economy. This is about stability. This is about growth. But most importantly this is about better serving our people, our workers, our entrepreneurs, our businesses and the generations to come.
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Rabu, 17 November 2010
Senin, 08 November 2010
SIFMA Incoming Chairman John Taft Remarks Before SIFMA's 2010 Annual Meeting: Dodd Frank Outlook
SIFMA Incoming Chairman John Taft Remarks Before SIFMA's 2010 Annual Meeting
Release Date: November 8, 2010
Contact: Katrina Cavalli, 212.313.1181, kcavalli@sifma.org
Andrew DeSouza, 202.962.7390, adesouza@sifma.org
As Prepared for Delivery: SIFMA Incoming Chairman John Taft Remarks Before SIFMA’s 2010 Annual Meeting
New York, NY, November 8, 2010--Good morning. 235 rulemakings, 41 reports, 71 studies authored by eleven different federal agencies, bureaus and the Government Accountability Office.
That’s what the Dodd-Frank Act requires be accomplished over the next two-to-five years.
This massive undertaking – the single largest delegation of rulemaking authority by Congress to regulators in modern history – is a daunting task. But fortunately, in contrast to last Fall and Spring, work on Dodd-Frank has become somewhat de-politicized.
During the legislative phase of financial regulatory reform, we all listened to and witnessed a lot of misinformation, heated rhetoric and anger.
Now we’ve moved from a hot medium to a cool one. From rhetoric to analysis. From emotion to fact. From political theatre to operating realities.
SIFMA can and must step up to provide the critical input regulatory bodies need to write these rules.
Frankly, our biggest fear is that regulators will be overwhelmed by the assignment. Not because there aren’t good, smart people working there, but there simply aren’t enough of them.
And many of these agencies are being asked to take an oversight role that is outside of anything they’ve done in the past. There’s simply not a legacy of core competency around certain issues.
They need help. They know they need help. And believe it or not, they welcome it.
So we are doing everything we can to provide fact-based, content-rich analysis. To provide the expertise required to create rules that will help the financial services industry do what we do best -- when we stay focused on and remain true to our mission -- which is to help facilitate and foster economic growth… something our country desperately needs right now.
As your Chair-Elect for the past year, I am proud of the way SIFMA embraced responsible financial reform from very outset of the Dodd-Frank debate.
Even before the crisis of 2008, we discussed in SIFMA Board meetings the fact that the rules under which we were operating, many of which written at the beginning of the last century, were simply not adequate to govern the functioning of our modern financial system.
SIFMA was then and continues to be a leading advocate for financial regulatory reform – but reform that balances the creation of a safer, sounder, more secure financial system with the recognition that that system is critical to economic growth.
In order to achieve that balance, we need to help regulators write regulations that prevent the broad and deep contagion that infected the entire system two years ago, without inhibiting the ability of our financial institutions to promote economic growth.
Does Dodd-Frank do that?
We simply don’t know yet.
Certainly, in broad strokes, that was its intent.
But whether it will deliver on the intentions of its Congressional authors depends entirely on just how, over the next two-to-five years, legislative mandates get translated into regulations.
Some new rules are coming down fast. The CFTC wants the new regs governing derivatives written by Christmas.
But this phase of reform shouldn’t just be about meeting rulemaking deadlines. It’s about getting it right. We need to get it right.
The stakes are too high for anything less.
Poorly crafted regulations could have unintended consequences that constrain capital formation or even increase systemic risk—the exact opposite of the intent of Dodd-Frank.
How is SIFMA responding?
We recognize that to be most effective, we need to prioritize. So for the past several months, since Dodd-Frank was enacted, and through 2011, SIFMA is focusing primarily, but not exclusively, on the following priority issues:
Systemic risk. SIFMA has unequivocally supported the need to eliminate the risk of firms being “too big to fail”? But what institutions will be designated as systemically significant? How will they then be regulated? Who will have a 360 degree view of all systematically important financial institutions?
Dodd-Frank created two new entities: the Financial Stability Oversight Council and the Office of Financial Research.
As currently written, the FSOC will oversee bank holding companies with total consolidated assets of more than $50 billion, and can also designate non-bank financial institutions as systemically significant by a 2/3 vote of its members.
What criteria will be in place to designate a firm as systemically significant? We believe assets alone should not be the standard — the $50 billion cited in the bill is likely too low — and interconnectedness of business lines needs to play a role. Here, as throughout the rulemaking process, details need to be hammered out.
Resolution authority. How do we, going forward, handle a failure of a large, interconnected firm? To preserve market stability and prevent risking taxpayer money, SIFMA supports having a comprehensive resolution authority wind down any failed financial institution.
Dodd–Frank now grants that authority to the FDIC. Also, large complex companies are required to periodically submit living wills to both the FDIC and the Fed.
Derivatives regulation. As we all know, the watchword here is transparency. SIFMA supports using clearing organizations for standardized transactions, and data repositories for all other OTC derivative transactions—all under federal regulatory oversight that ensures the availability of complete trading information.
Starting almost immediately, the trading of derivatives will move from a primarily over-the-counter market to central clearing houses and exchange trading, overseen by the Commodity Futures Trading Commission, CFTC, and the SEC. The rules under which the CFTC and SEC carry out their oversight remain to be written.
When it comes to securitization, Dodd-Frank mandates risk retention of 5 percent, with an exemption for securitizations of “qualified” mortgages — your plain vanilla, well underwritten, 30-year home loan. It also states that regulators should reduce their use of credit rating agencies. What that means in real terms still needs to be determined through the rulemaking process.
We are also focusing on Capital And Liquidity Requirements. Dodd-Frank has moved in the same direction as the Basel III proposals, but, again, numerous details need to be resolved to avoid unintended negative consequences.
The legislation requires systematically important companies to maintain a debt-to-equity ratio of 15-to-1, with preferred and hybrid capital counting as Tier 2, not Tier 1, capital. Banks are required to hold a 30-day liquidity buffer. A counter-cyclical means of permitting banks to build in capital buffers has yet to be formulated.
Under the part of Dodd-Frank known as the Volcker Rule (our next priority) --created in an attempt to get at the root cause of the financial crisis (which, by the way, we don’t believe it does) -- all proprietary trading by bank holding companies is prohibited. And bank holding companies are generally prohibited from investing in, advising on or owning hedge funds or private equity funds.
Pure proprietary trading for one’s own account is a limited activity for most banks. But trading and taking positions in securities has been an essential market-making tool. It keeps markets liquid, too.
In light of that fact, we’re working with regulators to implement the Volcker rule in a way that does not inadvertently limit market making and, in turn, reduce liquidity—outcomes that would increase volatility and risk.
Our final rulemaking priority is the creation of a federal fiduciary standard that would apply uniformly to all investment advisors and broker/dealers who provide personalized investment advice to retail investors about securities, regardless of their business model. We need to make sure the standard is written in a way that preserves investor choice of the products and services that best fit individual investment needs.
Systemic risk. Resolution authority. Derivatives regulation. Securitization. Capital and liquidity requirements. Volker. A new Fiduciary Standard of care.
Those are just the primary areas SIFMA is addressing. I haven’t even mentioned the fact that these and other new regulations need to work with existing global regulations, and will need to coordinate with rules still evolving overseas.
The good news is that we have the expertise within SIFMA – our staff, our Board, our members -- and we will commit the necessary resources to provide regulators with the guidance, data, facts and intellectual content they need to get it right.
Here’s my ask of all of you: Get involved. Understand how we’ve organized and how we’re mobilizing. Join the committee that represents your particular area of expertise.
If you can’t make that kind of commitment, communicate with committee members. You don’t have to know who to call – call who you know. Send us your thoughts on how we can most effectively operationalize Dodd-Frank.
Remember, this is an evolving process. Follow the rulemaking with us. Every commentary we provide to the regulators will be posted the day it is submitted on SIFMA.org. Which, by the way, has been totally redesigned and reorganized to be more user-friendly than ever.
This is a messy process. But it is the process that will create the rules we will operate under for years and years to come. It’s a process we are deeply involved in. It’s a process that you all, as SIFMA members, have a responsibility to be part of. We know what we need to do. Help us get it done. For the sake of our industry, our economy and our country.
Only by working together can we maximize the chances that we will get this right.
Ladies and gentlemen – it is an honor to have served as your Chair-Elect at this critical time in the history of our industry and to have worked with a staff as capable and committed as that of Tim Ryan and his team.
Thank you.
-30-
Release Date: November 8, 2010
Contact: Katrina Cavalli, 212.313.1181, kcavalli@sifma.org
Andrew DeSouza, 202.962.7390, adesouza@sifma.org
As Prepared for Delivery: SIFMA Incoming Chairman John Taft Remarks Before SIFMA’s 2010 Annual Meeting
New York, NY, November 8, 2010--Good morning. 235 rulemakings, 41 reports, 71 studies authored by eleven different federal agencies, bureaus and the Government Accountability Office.
That’s what the Dodd-Frank Act requires be accomplished over the next two-to-five years.
This massive undertaking – the single largest delegation of rulemaking authority by Congress to regulators in modern history – is a daunting task. But fortunately, in contrast to last Fall and Spring, work on Dodd-Frank has become somewhat de-politicized.
During the legislative phase of financial regulatory reform, we all listened to and witnessed a lot of misinformation, heated rhetoric and anger.
Now we’ve moved from a hot medium to a cool one. From rhetoric to analysis. From emotion to fact. From political theatre to operating realities.
SIFMA can and must step up to provide the critical input regulatory bodies need to write these rules.
Frankly, our biggest fear is that regulators will be overwhelmed by the assignment. Not because there aren’t good, smart people working there, but there simply aren’t enough of them.
And many of these agencies are being asked to take an oversight role that is outside of anything they’ve done in the past. There’s simply not a legacy of core competency around certain issues.
They need help. They know they need help. And believe it or not, they welcome it.
So we are doing everything we can to provide fact-based, content-rich analysis. To provide the expertise required to create rules that will help the financial services industry do what we do best -- when we stay focused on and remain true to our mission -- which is to help facilitate and foster economic growth… something our country desperately needs right now.
As your Chair-Elect for the past year, I am proud of the way SIFMA embraced responsible financial reform from very outset of the Dodd-Frank debate.
Even before the crisis of 2008, we discussed in SIFMA Board meetings the fact that the rules under which we were operating, many of which written at the beginning of the last century, were simply not adequate to govern the functioning of our modern financial system.
SIFMA was then and continues to be a leading advocate for financial regulatory reform – but reform that balances the creation of a safer, sounder, more secure financial system with the recognition that that system is critical to economic growth.
In order to achieve that balance, we need to help regulators write regulations that prevent the broad and deep contagion that infected the entire system two years ago, without inhibiting the ability of our financial institutions to promote economic growth.
Does Dodd-Frank do that?
We simply don’t know yet.
Certainly, in broad strokes, that was its intent.
But whether it will deliver on the intentions of its Congressional authors depends entirely on just how, over the next two-to-five years, legislative mandates get translated into regulations.
Some new rules are coming down fast. The CFTC wants the new regs governing derivatives written by Christmas.
But this phase of reform shouldn’t just be about meeting rulemaking deadlines. It’s about getting it right. We need to get it right.
The stakes are too high for anything less.
Poorly crafted regulations could have unintended consequences that constrain capital formation or even increase systemic risk—the exact opposite of the intent of Dodd-Frank.
How is SIFMA responding?
We recognize that to be most effective, we need to prioritize. So for the past several months, since Dodd-Frank was enacted, and through 2011, SIFMA is focusing primarily, but not exclusively, on the following priority issues:
Systemic risk. SIFMA has unequivocally supported the need to eliminate the risk of firms being “too big to fail”? But what institutions will be designated as systemically significant? How will they then be regulated? Who will have a 360 degree view of all systematically important financial institutions?
Dodd-Frank created two new entities: the Financial Stability Oversight Council and the Office of Financial Research.
As currently written, the FSOC will oversee bank holding companies with total consolidated assets of more than $50 billion, and can also designate non-bank financial institutions as systemically significant by a 2/3 vote of its members.
What criteria will be in place to designate a firm as systemically significant? We believe assets alone should not be the standard — the $50 billion cited in the bill is likely too low — and interconnectedness of business lines needs to play a role. Here, as throughout the rulemaking process, details need to be hammered out.
Resolution authority. How do we, going forward, handle a failure of a large, interconnected firm? To preserve market stability and prevent risking taxpayer money, SIFMA supports having a comprehensive resolution authority wind down any failed financial institution.
Dodd–Frank now grants that authority to the FDIC. Also, large complex companies are required to periodically submit living wills to both the FDIC and the Fed.
Derivatives regulation. As we all know, the watchword here is transparency. SIFMA supports using clearing organizations for standardized transactions, and data repositories for all other OTC derivative transactions—all under federal regulatory oversight that ensures the availability of complete trading information.
Starting almost immediately, the trading of derivatives will move from a primarily over-the-counter market to central clearing houses and exchange trading, overseen by the Commodity Futures Trading Commission, CFTC, and the SEC. The rules under which the CFTC and SEC carry out their oversight remain to be written.
When it comes to securitization, Dodd-Frank mandates risk retention of 5 percent, with an exemption for securitizations of “qualified” mortgages — your plain vanilla, well underwritten, 30-year home loan. It also states that regulators should reduce their use of credit rating agencies. What that means in real terms still needs to be determined through the rulemaking process.
We are also focusing on Capital And Liquidity Requirements. Dodd-Frank has moved in the same direction as the Basel III proposals, but, again, numerous details need to be resolved to avoid unintended negative consequences.
The legislation requires systematically important companies to maintain a debt-to-equity ratio of 15-to-1, with preferred and hybrid capital counting as Tier 2, not Tier 1, capital. Banks are required to hold a 30-day liquidity buffer. A counter-cyclical means of permitting banks to build in capital buffers has yet to be formulated.
Under the part of Dodd-Frank known as the Volcker Rule (our next priority) --created in an attempt to get at the root cause of the financial crisis (which, by the way, we don’t believe it does) -- all proprietary trading by bank holding companies is prohibited. And bank holding companies are generally prohibited from investing in, advising on or owning hedge funds or private equity funds.
Pure proprietary trading for one’s own account is a limited activity for most banks. But trading and taking positions in securities has been an essential market-making tool. It keeps markets liquid, too.
In light of that fact, we’re working with regulators to implement the Volcker rule in a way that does not inadvertently limit market making and, in turn, reduce liquidity—outcomes that would increase volatility and risk.
Our final rulemaking priority is the creation of a federal fiduciary standard that would apply uniformly to all investment advisors and broker/dealers who provide personalized investment advice to retail investors about securities, regardless of their business model. We need to make sure the standard is written in a way that preserves investor choice of the products and services that best fit individual investment needs.
Systemic risk. Resolution authority. Derivatives regulation. Securitization. Capital and liquidity requirements. Volker. A new Fiduciary Standard of care.
Those are just the primary areas SIFMA is addressing. I haven’t even mentioned the fact that these and other new regulations need to work with existing global regulations, and will need to coordinate with rules still evolving overseas.
The good news is that we have the expertise within SIFMA – our staff, our Board, our members -- and we will commit the necessary resources to provide regulators with the guidance, data, facts and intellectual content they need to get it right.
Here’s my ask of all of you: Get involved. Understand how we’ve organized and how we’re mobilizing. Join the committee that represents your particular area of expertise.
If you can’t make that kind of commitment, communicate with committee members. You don’t have to know who to call – call who you know. Send us your thoughts on how we can most effectively operationalize Dodd-Frank.
Remember, this is an evolving process. Follow the rulemaking with us. Every commentary we provide to the regulators will be posted the day it is submitted on SIFMA.org. Which, by the way, has been totally redesigned and reorganized to be more user-friendly than ever.
This is a messy process. But it is the process that will create the rules we will operate under for years and years to come. It’s a process we are deeply involved in. It’s a process that you all, as SIFMA members, have a responsibility to be part of. We know what we need to do. Help us get it done. For the sake of our industry, our economy and our country.
Only by working together can we maximize the chances that we will get this right.
Ladies and gentlemen – it is an honor to have served as your Chair-Elect at this critical time in the history of our industry and to have worked with a staff as capable and committed as that of Tim Ryan and his team.
Thank you.
-30-
Selasa, 26 Oktober 2010
Statement by SIFMA President and CEO Tim Ryan in Connection with National Economists Club Speech
Press Release
Release Date: October 26, 2010
Contact: Andrew DeSouza, (202) 962-7390, adesouza@sifma.org
Statement by SIFMA President and CEO Tim Ryan in Connection with National Economists Club Speech
Washington, DC, October 26, 2010—The Securities Industry and Financial Markets Association today released the following statement from President and CEO Tim Ryan in connection with his speech to the National Economists Club:
—The Securities Industry and Financial Markets Association today released the following statement from President and CEO Tim Ryan in connection with his to the National Economists Club:
235 rulemakings, 41 reports, 71 studies authored by eleven different federal agencies, bureaus and the Government Accountability Office.
That’s what, as legislated by the Dodd-Frank Act, needs to be studied and written over the next two-to-five years. And that’s just in the United States.
Parallel rulemaking is taking shape across the globe, initiated by the same financial crisis, and necessitated by the fact that we do business today in a global economy. It will be vital for global rules to be coordinated and to apply equally to the entire industry to avoid market distortions, regulatory arbitrage and competitive advantages among different jurisdictions.
Our focus—everyone’s focus—must be on how we safeguard our financial system without constraining capital formation, credit availability and our industry’s ability to contribute to economic growth and job creation.
With the breadth and depth of SIFMA’s membership—which includes global, national and regional securities firms, banks and asset managers active in financial markets around the world— we can and will be a trusted, credible resource for everyone participating in the regulatory rulemaking process.
This isn’t about simply meeting the rulemaking deadlines, it’s about getting it done right. The stakes are too high for anything less. Poorly crafted regulations that create market distortions or other unintended consequences could constrain capital formation or even increase systemic risk—the exact opposite of the intent of Dodd-Frank.
To be most effective, SIFMA is focusing primarily on seven areas:
· systemic risk, specifically the new Financial Stability Oversight Counsel and its research arm the Office of Financial Research;
· resolution authority and living wills;
· oversight of the over-the-counter derivatives market;
· securitization and the credit rating agencies;
· capital and liquidity standards via Basel and Dodd-Frank;
· the future of proprietary trading and private equity under what’s come to be known as the Volcker Rule; and
· the creation of a federal fiduciary standard for investment advisors and broker/dealers who provide personalized investment advice to retail investors.
With many firms operating in a global financial system, what happens in one jurisdiction does affect firms operating globally. In addition to the work we’ll be doing on Dodd-Frank rulemaking, we’re paying close attention to what is happening globally, focusing primarily on the west by looking at the regulatory efforts of the United Kingdom, the European Union and the Financial Stability Board.
Systemic Risk
To deal with systemic risk in the U.S., Dodd-Frank has created two new entities, the Financial Stability Oversight Council (FSOC), and its research arm, the Office of Financial Research, which will provide analytical support. FSOC will oversee bank holding companies with total consolidated assets of more than $50 billion. The FSOC can also designate non-bank financial institutions as systemically significant by a 2/3 vote of the FSOC’s 10 voting members.
In Europe, the European Commission is looking into what attributes beyond size alone make an institution financially risky, and, much like the FSOC, has established the European Systemic Risk Board, monitoring risk to the 27 EU countries and coordinating the actions of national supervisors. It is comprised of Europe’s Central Bankers, and to coordinate with among others the European Supervisory Authorities.
Resolution Authority
To address the failure of a large, interconnected financial institution the U.S. and UK has already created a new resolution authority, with Europe following. Dodd–Frank has granted the FDIC the explicit authority to unwind failing firms or covered financial companies, and large complex companies are now required to periodically submit living wills to the FDIC and the Federal Reserve.
In addition to the existing resolution authority, the UK is proposing a separate administrator for investment firms. The UK’s recently passed Financial Services Bill also requires firms to submit living wills. In addition, they are investigating the utility of contingent capital or “CoCos” and bail-ins. Questions remain as to what other countries within the EU might consider and how each of these processes will interact.
In the end, the goal is to provide for a process that will wind down failing institutions, end ‘too-big-to-fail,’ and ensure functioning financial markets.
Derivatives
For the first time, the trading of derivatives will move from a primarily over-the-counter market to one utilizing central clearing houses and exchange trading. Both the EU and the U.S. will soon have mandated central clearing of most swaps. In the U.S., beyond those swaps that are fundamentally not suitable for clearing, the only exception to the mandated clearing requirement is for trades where one party is a non-financial, hedging end-user. Otherwise, all swaps that are clearable will be cleared, and in addition required to be executed on an exchange or swap execution facility (SEF). Dodd-Frank also now makes the regulation of over-the-counter derivatives the responsibility of the Commodity Futures Trading Commission and the Securities and Exchange Commission.
In Europe, central clearing of standardized contracts also will take place through CCPs, with additional capital charges made for non-centrally cleared contracts.
SIFMA is working with ISDA and the FIA to ensure that these reforms, among others, will aid in more effectively managing the interconnectivity these products create, without making the cost of risk management prohibitive.
Securitization
When it comes to securitization, we again see very similar mandates on both sides of the Atlantic— mandatory risk retention of 5 percent. However, here in the U.S., Congress provided regulators discretion in imposing such retention and exempted any retention for securitizations of “qualified” residential mortgages, a new classification to be defined, but presumably your plain vanilla, well underwritten, 30-year home loan and allows regulators to implement retention regimes—and amounts—calibrated to different asset classes.
Dodd-Frank also states that regulators should reduce financial institutions’ reliance on credit rating agencies in regulation and supervisory practices. Bank regulators have put out for comment an initial proposal regarding this provision.
The EU has already addressed this by requiring EU market participants use only EU-registered CRA issued ratings for their regulatory purposes.
Getting these efforts right will help create more aligned interests of dealers and investors, without choking off consumer credit for businesses and families.
Capital and Liquidity Requirements
When it comes to capital and liquidity requirements for systematically important companies, Dodd-Frank and Basel III are both fairly specific.
Dodd-Frank requires these companies to maintain a debt-to-equity ratio of 15-to-1, with trust preferred and hybrid capital counting as Tier 2, not Tier 1, capital. Banks are required to hold a 30-day liquidity buffer. What we still need to formulate is a counter-cyclical means of permitting banks to build in capital buffers.
Basel III’s capital and liquidity rule sets out total capital requirements of 10.5 percent, broken out as 8.5 percent Tier 1 capital and 7 percent common equity. Liquidity requirements include a liquidity coverage ratio for 30-day systemic and idiosyncratic risk and a net stable funding ratio for 1-year idiosyncratic risk.
The leverage ratio will supplement, rather than replace, the current risk-based minimum capital ratio.
Still being explored by the committee is the utility of dynamic provisioning as a useful countercyclical measure.
Volcker Rule
Financial institutions in the United States will also have to work with the ban on proprietary trading and private equity within Dodd-Frank has come to be known as the Volcker Rule. All proprietary trading by bank holding companies is prohibited. The important aspect will be how regulators define what activities are deemed “proprietary”’ and thus prohibited, while ensuring that markets remain liquid and deep.
Also, bank holding companies are generally prohibited from investing in, advising on or owning hedge funds or private equity funds. Total investments are limited to 3 percent of tier 1 capital. Investments in a fund within the first year of its establishment are capped at 3 percent of that fund.
The UK’s Independent Banking Commission is calling for evidence on whether limits on proprietary trading and investment are warranted. But how will a U.S.-only rule such as this affect our nation’s competitiveness with Europe, who is generally not considering such a rule?
Fiduciary Duty
A strictly domestic, and far less cut and dry, piece of rulemaking is the creation of a federal fiduciary standard that would apply—uniformly—to all investment advisers and brokers providing personalized investment advice to retail investors about securities, regardless of their business model.
Making sure the standard is written in a way that preserves investor choice of the products and services that best fit individual investment needs is a little tougher. It’s writing rules about the intersection of conduct and offerings.
So, as you’ve seen, six out of the seven areas in Dodd-Frank we’re focusing on have a global, or at the least EU, equivalent.
But we’ll be involved in other areas of the Dodd-Frank rulemaking process, such as compensation, the regulation of hedge funds and short sales. And we’ll also be offering commentary on the convergence of FASB and IFRS and the resulting accounting standards that will emerge.
Reforming Housing Finance
And there are some issues that are vital to the U.S. economy and financial markets that are not in the Dodd-Frank Act. Two immediate concerns are reforming our housing finance system and the taxing capital gains and dividends.
The GSEs, government sponsored entities, primarily through Fannie Mae and Freddie Mac in mortgage finance, have made possible cost-effective lending to consumers for the past 30 years. Our members active in these markets believe some form of government support will be necessary to attract and maintain capital investment in the U.S. mortgage market anywhere near the historical level over the past several decades, but recognize there is no single, easy answer for the task of reforming them.
Additionally, recent press coverage has focused on issues within the mortgage foreclosure process and its impact on the securitization markets. Indeed, some have called for a national moratorium on all foreclosures until these issues have been addressed.
Let me be clear: imposing a system-wide foreclosure moratorium would be catastrophic to the housing market and to the economy.
The mortgage market, investors and the health of the economy are all inter-related. Investors in the housing market include American workers with pension funds, 401(k) plans, and mutual funds. These hardworking Americans would unjustly suffer losses in their savings from a foreclosure moratorium.
A foreclosure moratorium would create increased uncertainty in the already weak securitization and housing markets, further constraining consumer credit and spending and dampening our already unhealthy economic situation.
If mistakes have been made in relation to foreclosure processing, SIFMA firmly believes such mistakes should be corrected accurately and fairly.
While each situation may have variations, we believe the customary loan transfer and assignment practices used in securitization are legally sound an in accordance with generally accepted and settled legal principles. We believe sweeping generalizations regarding endemic defects are not accurate.
Foreclosures are in no one’s best interest, neither the bank nor the homeowner nor the investor, but in some cases are unavoidable. In those situations, moratoriums and similar actions will only delay the inevitable, and lengthen the timeline for housing recovery.
Capital Gains and Dividends Taxation
Investors also need certainty with respect to tax issues as nearly all of the Bush era tax cuts are set to expire at the end of this year. As to capital gains and dividends, without Congressional action—soon—the tax rates on capital gains will increase by 33 percent and the rates on dividends will increase by 164 percent—that’s right 164 percent— this coming January 1. Seniors on fixed incomes will be hit particularly hard by these increases, resulting for many in significant decreases in their discretionary spending. And higher tax rates on investment income will lead to fewer jobs, lower take-home pay and even slower economic.
January 1 is not far off, and that’s a very big change. Right now, the lack of action is already having a negative effect on investors. Investors like certainty, and they’re not getting it. Congress should provide that certainty by extending the current 15 percent tax rates in capital gains and dividends before the end of 2010.
Conclusion
The financial industry and federal regulators are faced with an unprecedented task over the next 2 to 5 years. Many of the agencies tasked with making these rules are taking on responsibilities outside their historical purview; the expertise needed to get these regulations right doesn’t necessarily reside within their walls. However, there is a robust rulemaking process that encourages comment. Again, we are committed to being a valuable resource during this rulemaking process, providing content-rich, fact-based commentary, drawing on the expertise of SIFMA’s member firms, And, when needed, we are moving beyond even that, contracting for third-party, in-depth economic analysis of the effects of proposed regulations.
We’re also concerned with how our new regulations will coordinate with similar efforts internationally. And how all of these new rules, working together, will affect capital formation, credit availability, economic growth, and ultimately the prosperity of consumers.
We’re doing all this because we must get these regulations right; the stakes are too high to do anything less. Unintended consequences of poorly crafted regulations could slow economic growth and stifle job creation; it could create capital market winners and losers.
This is not what any of us wants. We’ll be living with these regulations for decades. Let’s look back at the next two to five years as the time when we laid a foundation for growth and safety—as the time when we all got it right.
-30-
The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds of securities firms, banks and asset managers. SIFMA's mission is to support a strong financial industry, investor opportunity, capital formation, job creation and economic growth, while building trust and confidence in the financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit www.sifma.org.
Release Date: October 26, 2010
Contact: Andrew DeSouza, (202) 962-7390, adesouza@sifma.org
Statement by SIFMA President and CEO Tim Ryan in Connection with National Economists Club Speech
Washington, DC, October 26, 2010—The Securities Industry and Financial Markets Association today released the following statement from President and CEO Tim Ryan in connection with his speech to the National Economists Club:
—The Securities Industry and Financial Markets Association today released the following statement from President and CEO Tim Ryan in connection with his to the National Economists Club:
235 rulemakings, 41 reports, 71 studies authored by eleven different federal agencies, bureaus and the Government Accountability Office.
That’s what, as legislated by the Dodd-Frank Act, needs to be studied and written over the next two-to-five years. And that’s just in the United States.
Parallel rulemaking is taking shape across the globe, initiated by the same financial crisis, and necessitated by the fact that we do business today in a global economy. It will be vital for global rules to be coordinated and to apply equally to the entire industry to avoid market distortions, regulatory arbitrage and competitive advantages among different jurisdictions.
Our focus—everyone’s focus—must be on how we safeguard our financial system without constraining capital formation, credit availability and our industry’s ability to contribute to economic growth and job creation.
With the breadth and depth of SIFMA’s membership—which includes global, national and regional securities firms, banks and asset managers active in financial markets around the world— we can and will be a trusted, credible resource for everyone participating in the regulatory rulemaking process.
This isn’t about simply meeting the rulemaking deadlines, it’s about getting it done right. The stakes are too high for anything less. Poorly crafted regulations that create market distortions or other unintended consequences could constrain capital formation or even increase systemic risk—the exact opposite of the intent of Dodd-Frank.
To be most effective, SIFMA is focusing primarily on seven areas:
· systemic risk, specifically the new Financial Stability Oversight Counsel and its research arm the Office of Financial Research;
· resolution authority and living wills;
· oversight of the over-the-counter derivatives market;
· securitization and the credit rating agencies;
· capital and liquidity standards via Basel and Dodd-Frank;
· the future of proprietary trading and private equity under what’s come to be known as the Volcker Rule; and
· the creation of a federal fiduciary standard for investment advisors and broker/dealers who provide personalized investment advice to retail investors.
With many firms operating in a global financial system, what happens in one jurisdiction does affect firms operating globally. In addition to the work we’ll be doing on Dodd-Frank rulemaking, we’re paying close attention to what is happening globally, focusing primarily on the west by looking at the regulatory efforts of the United Kingdom, the European Union and the Financial Stability Board.
Systemic Risk
To deal with systemic risk in the U.S., Dodd-Frank has created two new entities, the Financial Stability Oversight Council (FSOC), and its research arm, the Office of Financial Research, which will provide analytical support. FSOC will oversee bank holding companies with total consolidated assets of more than $50 billion. The FSOC can also designate non-bank financial institutions as systemically significant by a 2/3 vote of the FSOC’s 10 voting members.
In Europe, the European Commission is looking into what attributes beyond size alone make an institution financially risky, and, much like the FSOC, has established the European Systemic Risk Board, monitoring risk to the 27 EU countries and coordinating the actions of national supervisors. It is comprised of Europe’s Central Bankers, and to coordinate with among others the European Supervisory Authorities.
Resolution Authority
To address the failure of a large, interconnected financial institution the U.S. and UK has already created a new resolution authority, with Europe following. Dodd–Frank has granted the FDIC the explicit authority to unwind failing firms or covered financial companies, and large complex companies are now required to periodically submit living wills to the FDIC and the Federal Reserve.
In addition to the existing resolution authority, the UK is proposing a separate administrator for investment firms. The UK’s recently passed Financial Services Bill also requires firms to submit living wills. In addition, they are investigating the utility of contingent capital or “CoCos” and bail-ins. Questions remain as to what other countries within the EU might consider and how each of these processes will interact.
In the end, the goal is to provide for a process that will wind down failing institutions, end ‘too-big-to-fail,’ and ensure functioning financial markets.
Derivatives
For the first time, the trading of derivatives will move from a primarily over-the-counter market to one utilizing central clearing houses and exchange trading. Both the EU and the U.S. will soon have mandated central clearing of most swaps. In the U.S., beyond those swaps that are fundamentally not suitable for clearing, the only exception to the mandated clearing requirement is for trades where one party is a non-financial, hedging end-user. Otherwise, all swaps that are clearable will be cleared, and in addition required to be executed on an exchange or swap execution facility (SEF). Dodd-Frank also now makes the regulation of over-the-counter derivatives the responsibility of the Commodity Futures Trading Commission and the Securities and Exchange Commission.
In Europe, central clearing of standardized contracts also will take place through CCPs, with additional capital charges made for non-centrally cleared contracts.
SIFMA is working with ISDA and the FIA to ensure that these reforms, among others, will aid in more effectively managing the interconnectivity these products create, without making the cost of risk management prohibitive.
Securitization
When it comes to securitization, we again see very similar mandates on both sides of the Atlantic— mandatory risk retention of 5 percent. However, here in the U.S., Congress provided regulators discretion in imposing such retention and exempted any retention for securitizations of “qualified” residential mortgages, a new classification to be defined, but presumably your plain vanilla, well underwritten, 30-year home loan and allows regulators to implement retention regimes—and amounts—calibrated to different asset classes.
Dodd-Frank also states that regulators should reduce financial institutions’ reliance on credit rating agencies in regulation and supervisory practices. Bank regulators have put out for comment an initial proposal regarding this provision.
The EU has already addressed this by requiring EU market participants use only EU-registered CRA issued ratings for their regulatory purposes.
Getting these efforts right will help create more aligned interests of dealers and investors, without choking off consumer credit for businesses and families.
Capital and Liquidity Requirements
When it comes to capital and liquidity requirements for systematically important companies, Dodd-Frank and Basel III are both fairly specific.
Dodd-Frank requires these companies to maintain a debt-to-equity ratio of 15-to-1, with trust preferred and hybrid capital counting as Tier 2, not Tier 1, capital. Banks are required to hold a 30-day liquidity buffer. What we still need to formulate is a counter-cyclical means of permitting banks to build in capital buffers.
Basel III’s capital and liquidity rule sets out total capital requirements of 10.5 percent, broken out as 8.5 percent Tier 1 capital and 7 percent common equity. Liquidity requirements include a liquidity coverage ratio for 30-day systemic and idiosyncratic risk and a net stable funding ratio for 1-year idiosyncratic risk.
The leverage ratio will supplement, rather than replace, the current risk-based minimum capital ratio.
Still being explored by the committee is the utility of dynamic provisioning as a useful countercyclical measure.
Volcker Rule
Financial institutions in the United States will also have to work with the ban on proprietary trading and private equity within Dodd-Frank has come to be known as the Volcker Rule. All proprietary trading by bank holding companies is prohibited. The important aspect will be how regulators define what activities are deemed “proprietary”’ and thus prohibited, while ensuring that markets remain liquid and deep.
Also, bank holding companies are generally prohibited from investing in, advising on or owning hedge funds or private equity funds. Total investments are limited to 3 percent of tier 1 capital. Investments in a fund within the first year of its establishment are capped at 3 percent of that fund.
The UK’s Independent Banking Commission is calling for evidence on whether limits on proprietary trading and investment are warranted. But how will a U.S.-only rule such as this affect our nation’s competitiveness with Europe, who is generally not considering such a rule?
Fiduciary Duty
A strictly domestic, and far less cut and dry, piece of rulemaking is the creation of a federal fiduciary standard that would apply—uniformly—to all investment advisers and brokers providing personalized investment advice to retail investors about securities, regardless of their business model.
Making sure the standard is written in a way that preserves investor choice of the products and services that best fit individual investment needs is a little tougher. It’s writing rules about the intersection of conduct and offerings.
So, as you’ve seen, six out of the seven areas in Dodd-Frank we’re focusing on have a global, or at the least EU, equivalent.
But we’ll be involved in other areas of the Dodd-Frank rulemaking process, such as compensation, the regulation of hedge funds and short sales. And we’ll also be offering commentary on the convergence of FASB and IFRS and the resulting accounting standards that will emerge.
Reforming Housing Finance
And there are some issues that are vital to the U.S. economy and financial markets that are not in the Dodd-Frank Act. Two immediate concerns are reforming our housing finance system and the taxing capital gains and dividends.
The GSEs, government sponsored entities, primarily through Fannie Mae and Freddie Mac in mortgage finance, have made possible cost-effective lending to consumers for the past 30 years. Our members active in these markets believe some form of government support will be necessary to attract and maintain capital investment in the U.S. mortgage market anywhere near the historical level over the past several decades, but recognize there is no single, easy answer for the task of reforming them.
Additionally, recent press coverage has focused on issues within the mortgage foreclosure process and its impact on the securitization markets. Indeed, some have called for a national moratorium on all foreclosures until these issues have been addressed.
Let me be clear: imposing a system-wide foreclosure moratorium would be catastrophic to the housing market and to the economy.
The mortgage market, investors and the health of the economy are all inter-related. Investors in the housing market include American workers with pension funds, 401(k) plans, and mutual funds. These hardworking Americans would unjustly suffer losses in their savings from a foreclosure moratorium.
A foreclosure moratorium would create increased uncertainty in the already weak securitization and housing markets, further constraining consumer credit and spending and dampening our already unhealthy economic situation.
If mistakes have been made in relation to foreclosure processing, SIFMA firmly believes such mistakes should be corrected accurately and fairly.
While each situation may have variations, we believe the customary loan transfer and assignment practices used in securitization are legally sound an in accordance with generally accepted and settled legal principles. We believe sweeping generalizations regarding endemic defects are not accurate.
Foreclosures are in no one’s best interest, neither the bank nor the homeowner nor the investor, but in some cases are unavoidable. In those situations, moratoriums and similar actions will only delay the inevitable, and lengthen the timeline for housing recovery.
Capital Gains and Dividends Taxation
Investors also need certainty with respect to tax issues as nearly all of the Bush era tax cuts are set to expire at the end of this year. As to capital gains and dividends, without Congressional action—soon—the tax rates on capital gains will increase by 33 percent and the rates on dividends will increase by 164 percent—that’s right 164 percent— this coming January 1. Seniors on fixed incomes will be hit particularly hard by these increases, resulting for many in significant decreases in their discretionary spending. And higher tax rates on investment income will lead to fewer jobs, lower take-home pay and even slower economic.
January 1 is not far off, and that’s a very big change. Right now, the lack of action is already having a negative effect on investors. Investors like certainty, and they’re not getting it. Congress should provide that certainty by extending the current 15 percent tax rates in capital gains and dividends before the end of 2010.
Conclusion
The financial industry and federal regulators are faced with an unprecedented task over the next 2 to 5 years. Many of the agencies tasked with making these rules are taking on responsibilities outside their historical purview; the expertise needed to get these regulations right doesn’t necessarily reside within their walls. However, there is a robust rulemaking process that encourages comment. Again, we are committed to being a valuable resource during this rulemaking process, providing content-rich, fact-based commentary, drawing on the expertise of SIFMA’s member firms, And, when needed, we are moving beyond even that, contracting for third-party, in-depth economic analysis of the effects of proposed regulations.
We’re also concerned with how our new regulations will coordinate with similar efforts internationally. And how all of these new rules, working together, will affect capital formation, credit availability, economic growth, and ultimately the prosperity of consumers.
We’re doing all this because we must get these regulations right; the stakes are too high to do anything less. Unintended consequences of poorly crafted regulations could slow economic growth and stifle job creation; it could create capital market winners and losers.
This is not what any of us wants. We’ll be living with these regulations for decades. Let’s look back at the next two to five years as the time when we laid a foundation for growth and safety—as the time when we all got it right.
-30-
The Securities Industry and Financial Markets Association (SIFMA) brings together the shared interests of hundreds of securities firms, banks and asset managers. SIFMA's mission is to support a strong financial industry, investor opportunity, capital formation, job creation and economic growth, while building trust and confidence in the financial markets. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit www.sifma.org.
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