Financial Crisis News Center

House Legislation Hedging Exemption Subject to Floor Amendments

This story appeared in Jim Hamilton's World of Securities Regulation.

The House reform legislation would require over-the-counter derivatives trading to be conducted through clearinghouses, which are set up to police derivatives trading. Under HR 4173, if a clearing mandate applies to a swap or class of swaps, then the swap dealers and major swap participants not only have to clear such trades but also have to execute them on or through a futures or securities exchange or a swap execution facility. This provision provides greater price transparency and will narrow spreads, all to the benefit of the end user. For the end users, the bill provide an exemption from the clearing mandate and, consequently, from the execution mandate. The House defeated an amendment that would have imposed an execution mandate on end users.

House Legislation Requires FASB to Study Securitization Standards

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The House has passed legislation requiring the Federal Reserve Board, in consultation with the SEC, to conduct a study and report to Congress on the impact on individual classes of asset-backed securities of FASB’s new securitization accounting standards, FAS 166 and 167, and the Act’s new credit risk retention requirements.

The Wall Street Reform and Consumer Protection Act, HR 4173, says that the report must make statutory and regulatory recommendations for eliminating any negative impacts on the continued viability of the asset-backed securitization markets and on the availability of credit for new lending. The study would be required to be completed in 90 days.

CCH Briefing Paper Examines House Legislation

The CCH Editorial Staff of banking and securities law analysts has authored a detailed overview titled, "House Passes Wall Street Reform Act." From the introduction:

On December 11, 2009, the U.S. House of Representatives passed legislation to restructure the financial services regulatory system, the Wall Street Reform and Consumer Protection Act of 2009 (HR 4173), by a vote of 223-202. As discussed below, the sweeping array of reforms includes the Financial Stability Improvement Act, which would create a systemic risk regulator, strengthen regulation of depository institutions and bank holding companies, improve the asset-backed securitization process, and provide for an enhanced dissolution authority. The legislation also would create a Consumer Financial Protection Agency, reform the over-the-counter derivatives market, subject hedge funds to stricter scrutiny, impose new corporate governance mandates, adopt heightened requirements for credit rating agencies and expand regulatory enforcement powers. Among other measures, the legislation features expansive consumer mortgage protections and creates a Federal Insurance Office.

Download the briefing paper

Frank Op-ED Calls for “Comprehensive Solution to Combustible Markets”

This story appeared in Bank Digest.

In advance of consideration of H.R. 4173, “The Wall Street Reform and Consumer Protection Act,” by the House the Representatives, the Financial Services Committee has released a November 2009, Boston Globe Op-ED piece authored by Committee Chairman Barney Frank, D-Mass. The Frank Op-ED highlighted the need for regulating derivatives and citing the American International Group as “the poster child for the combination of reckless behavior and failed oversight.”

House Committee Completes Consideration of Reform Proposals

This story appeared in Bank Digest.

The House Financial Services Committee has announced that it has finished its work on the bills that have been offered to reform the regulation of the financial services system. The nine bills approved by the committee have been packaged into a single bill, The Wall Street Reform and Consumer Protection Act (H.R. 4173), which is scheduled for House floor debate during the week of Dec. 7, 2009. Provisions of the bill include:

• a Consumer Financial Protection Agency;
• a systemic risk oversight council;
• the authority to dissolve large, failing financial institutions;
• restrictions on executive compensation;
• enhanced investor protections;
• regulation of derivatives;
• mortgage and predatory lending reforms;
• credit rating agency regulation;
• hedge fund and private equity regulation; and
• an Office of Insurance.

New White Paper Offers Detailed Look at Dodd Bill

Jim Hamilton, J.D., LL. M., CCH Principal Analyst, and Richard Roth, CCH Writer Analyst, have authored an extensive white paper entitled, “Senate Banking Committee Releases Draft Legislation: Restoring American Financial Stability Act of 2009.” From the Introduction:

The Senate Banking Committee has released draft legislation that, if enacted, would provide a sweeping overhaul of the regulation of U.S. financial services and markets. The Restoring American Financial Stability Act of 2009 would regulate systemic risk, enhance transparency and disclosure, delink executive compensation from excessive risk, expand consumer and investor protection, and prevent regulatory arbitrage. The draft provides for the regulation of hedge funds and over-the-counter derivatives and would establish a new resolution authority to unwind failing financial firms. The legislation also provides for major corporate-governance reforms, such as shareholder advisory votes on compensation and enhanced compensation committees. The draft further envisions a completely reformed securitization process playing an important role in the financial markets. A new independent regulator would be created with authority to make sure that consumer protection regulations are written and enforced.

Download the White Paper

Senate Draft Legislation Aims to Reform Securitization

This story appeared in Jim Hamilton's World of Securities Regulation

In many ways, the financial crisis was at root a crisis of securitization. While traditional securitization was a successful tool for bundling loans into asset-backed securities, in the last decade it morphed into the short-term financing of complex illiquid securities whose value had to be determined by theoretical models. The inherent fragility of this new securitization model was masked by the actions of market intermediaries, particularly credit rating agencies.

Frank Issues Statement on Derivatives

This story appeared in Bank Digest.

Financial Services Committee Chairman Barney Frank, D-Mass., released a statement regarding a response received from Commodity Futures Trading Commission Chairman Gary Gensler. Chairman Gensler’s letter was responding to Chairman Frank’s November 4 letter. Frank noted “I appreciate Chairman Gensler’s agreeing that we should change the provision of the derivatives bill that he requested that would have put the clearinghouses in charge of determining that a trade is clearable. As some people pointed out, this could have given rise to a conflict of interest, given the financial stake that many firms have in the ownership of clearinghouses. While Chairman Gensler originally had indicated that making the clearing determination would be burdensome for the CFTC and thus should be left to the clearinghouses, I am now pleased that he agrees that the regulators should take on this function, which is preferable to the potential conflict.”

Frank Statement at http://www.house.gov/apps/list/press/financialsvcs_dem/pressgensler_110609.shtml

CFTC Response at http://www.house.gov/apps/list/press/financialsvcs_dem/gensler_reply_to_rep_frank.pdf

Frank Letter at http://financialservices.house.gov/pdf/Schapiro_Gensler_Letter100409.pdf

House Leader Asks for SEC-CFTC Input as Derivatives Legislation Moves towards Passage

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

As the House anticipates floor debate on legislation regulating derivatives, Financial Services Committee Chair Barney Frank has asked the SEC and CFTC for input in crafting two important amendments to the legislation. In a letter to SEC Chair Mary Schapiro and CFTC Chair Gary Gensler, Mr. Frank said that he would clarify who can claim the exception from the clearing and trading requirement; and also place solely with the SEC and CFTC the decision on what swaps must be cleared. Specifically, the Frank Amendment would clarify the exception for end-users hedging legitimate business risks. The amendment is designed to make the exception tight enough to prevent speculators from masquerading as end users.

Private Advisor Registration Bill Approved with Bipartisan Support

By Gregg D. Killoren, J.D., CCH State Banking Law Reporter, Bank Digest and Individual Retirement Plans Guide.

The House Financial Services Committee has passed by a vote of 67 to 1 the Private Fund Investment Advisers Registration Act of 2009 (H.R. 3818), which would require managers of most hedge funds, private equity funds and venture capital funds in the U.S. to register with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The existing exemption for investment advisers with fewer than 15 clients would be eliminated, and specific information reporting would be required for advisers to any “private fund.” A limited exemption would continue to apply to certain “foreign private advisers.” The existing threshold of $30 million of assets under management for mandatory SEC registration would continue to apply.