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The European Securities and Markets Authority has issued a discussion draft on proposed regulation of  OTC Derivatives, CCPs and trade repositories.  The draft introduces provisions to improve transparency and reduce the risks associated with the OTC derivatives market and establishes common rules for central counterparties and for trade repositories.

OTC derivatives legislation and clearing reforms understandably have European and US market participants scratching their heads about what this "sea of change" has in store for them and the future of OTC markets.   David Felsenthal, a partner at Clifford Chance LLP, has given the matter some serious thought, and provides some guidance in his January 14, 2012 post at Harvard Law School's Forum on Corporate Governance and Financial Regulation.

On December 20, 2011, the Federal Reserve Board of Directors published its long awaited proposal on enhanced prudential standards and early remediation requirements.  This proposal, required by the Dodd-Frank Act, would impose greater levels of regulation and supervision on certain US bank holding companies and systematically important non-bank financial companies.  

In a December 23, 2011 approval order in connection with the proposed acquisition of RBC Bank (USA), a North Carolina based unit of Royal Bank of Canada, by The PNC Financial Services Group, Inc. includes the FRB's first ever Dodd-Frank financial stability analysis.  This analysis may serve as a model for how the FRB will determine going forward “the extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system” now required under Dodd-Frank.    

The rush to reregulate the financial markets after the financial crisis understandably has many concerned about unintended consequences. Regardless of good intentions, the fixes put in place by legislators, central bankers, and regulators no matter how well thought out are bound to affect the complex and constantly evolving global financial markets in unanticipated ways.  Professor Roberta Romano of the Yale Law School shares these worries and proposes in her latest paper, "Regulating in the Dark," a mechanism for addressing and remediating the inevitable unintended consequences of hasty financial regulation.

The Basel Committee on Banking Supervision has issued for consultation its revised Core Principles for Effective Banking Supervision. The consultative paper updates the Committee's 2006 Core Principles document as well as the associated Core Principles Methodology, merging the two into a single comprehensive document. The revised set of twenty-nine Core Principles have also been reorganized to foster their implementation through a more logical structure, highlighting the difference between what supervisors do themselves and what they expect banks to do.

On December 20, ISS published its white paper laying out in detail the pay for performance methodology it will implement under its 2012 policy updates. The goal of the white paper is to help both institutional clients and the companies in which they invest more fully understand ISS’ pay-for-performance methodology in advance of the 2012 proxy season.

In her December 15, 2011 address before the Transatlantic Corporate Governance Dialogue, SEC Chairman, Mary L. Schapiro, stated that in response to comments received on the Commission's Proxy Plumbing concept release, the Commission is seriously considering providing guidance on how the federal securities laws should regulate the activities of proxy advisory firms, in addition to other key areas of proxy reform.

The financial crisis has put a spotlight on the corporate governance structures of financial institutions, raising questions about whether the prevailing governance structures of banks are ineffective and whether implementing independence standards imposed by the Dodd-Frank Act, the Sarbanes-Oxley Act and the major stock exchanges will improve bank governance. A recently published paper by Renee Adams, Professor of Finance at the University of New South Wales, and Hamid Mehran of the Federal Reserve Bank of New York, attempts to answer to this question by examining the relationship between board composition and size and bank performance.

Taiwan has recently taken steps to curb short selling and securities lending to address extreme share price volatility.  In an effort to stabilize equity markets, Taiwan's Financial Supervisory Commission on November 21 set a new daily limit on short selling of stocks.   According to the new daily cap, only 20 percent of average trading volume in the...

In an effort to address regulatory fragmentation in short selling regulations throughout the EU, The European Parliament has adopted a regulation to harmonize the rules on short selling and credit default swaps.  Regulation (2010) 0482 (the "Regulation") is limited in scope and imposes restrictions on short selling and credit default swaps to prevent a disorderly decline in the price of a financial instrument.  The Regulation does not impose other types of restrictions such as position limits or restrictions on products, however.

In a dialog at the Managed Funds Association Outlook 2011 seminar held in October, SEC Chairman Mary Schapiro commented on the international and domestic challenges regulators face in coordinating the regulation of derivatives. From this dialog we can take away some nuggets of assurance that the process of regulating OTC derivatives is being thoughtfully considered, efforts are being made to coordinate both domestically and internationally, and that the implementation process will contain few surprises. 

In a strongly worded letter to Federal Reserve Chair Ben Bernanke, Rep. Maurice Hinchey (D-NY), Rep. Peter Welch (D-VT), and 15 other House members urged the Fed and other federal regulators to reject the current draft of the Volcker Rule regulations and replace them with stronger language to prohibit commercial banks from engaging in investment activities.  

Institutional Shareholder Services Inc. (ISS) has published the 2012 updates to its US and international corporate governance policies. These guidelines are applicable to shareholder meetings held on or after February 1, 2012.  Given the attention regulators and legislators have taken in corporate governance issues as of late, the new ISS guidelines for US companies include changes in several important areas.

A Financial Stability Board task force has published recommendations to strengthen the oversight and regulation of the shadow banking system. These eagerly awaited recommendations provide much needed guidance to regulatory authorities on monitoring and designing regulation of shadow banking activities and entities.

In his October 6, 2011 testimony before the before the US Congress’s Committee on Banking, Housing, and Urban Affairs, Treasury Secretary Timothy F. Geithner made it clear that shadow banking remains an an area of great concern on his regulatory agenda.  Geithner...

For the most part, provisions of the Dodd–Frank Wall Street Reform and Consumer Protection relating to derivatives are aimed at increasing transparency, altering clearing and exchange trading requirements, regulation of swap dealers and other swap market participants, restrictions on swaps trading by banks and associated increases in capital and margin requirements. The Act leaves many of the details of implementation to regulators. With over a year behind us, we can now reflect on what regulators have proposed, adopted, and left unfinished with regard to swaps.

At its September 28, 2011 meeting, the Basel Committee (the “Committee) approved a range of measures aimed at finalizing the Committee’s July 2011 consultative document, “Global systemically important banks: Assessment methodology and the additional loss absorbency requirement.” The document sets out the Committee’s proposal on the assessment methodology for (1) determining global systemic importance, (2) determining the magnitude of additional loss absorbency that global systemically important banks should have, and (3) proposes the arrangements by which the methodologies will be phased in. 

Market events over the past several years have made it quite clear that meaningful and transparent financial data are vital to effective monitoring of market participants as well as understanding the scale of the shadow banking activities and their interconnectedness with the traditional banking system. In a June address in Frankfort, Jürgen Stark, a member of the Executive Board of the European Central Bank (ECB), announced new statistical data sets intended to improve the existing balance sheet and interest rate reporting by "monetary financial institutions." The ECB has introduced these new data sets as part of their effort develop relevant and real-time policies to assess systematic risks and keep apace of innovations and movements in the financial landscape.

The Financial Stability Board announced on September 1 the formation of dedicated work streams to help gauge the case for further regulatory action in five areas associated with shadow banking, notably including securities lending and repos. 

Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, explained his thoughts on redrawing the social contract between banking and society in light of the contract’s failure leading up to and during the financial crisis. According to Mr. Tucker, the traditional framework of the social contract was ill prepared to handle the realities of shadow banking and financial innovation, and hasty reregulation without first reexamining the social contract would be foolish.

In a report issued April 12, 2011, the Financial Stability Board (FSB) highlighted a number of practices engaged in by exchange-traded funds that may be sources of risk to financial stability.  Calling for greater disclosure and transparency, securities lending was among the practices red-flagged by the FSB. 

Legislators will be better equipped to enact appropriate reforms if their deliberations are based on meaningful data regarding hedge funds.

IOSCO: IOSCO believes that regulators should seek to develop a comparable and consistent set of data to be collected from local hedge fund managers and advisers to monitor systemic risks and prevent gaps in regulatory reporting requirements. We recognise that the legislative process is ongoing in many jurisdictions and their outcomes could further influence the information needed to monitor systemic risk in the hedge fund sector, as well as who collects the data. Nonetheless, setting out these categories of information may help regulators in the assessment of systemic risk and help to inform the relevant legislative debates.[1]

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Dr. Franz-Christoph Zeitler, vice president of the Deutsche Bundsbank, speaking in Frankfurt on September 24, 2009, noted the failures of  backward-looking quantitative risk measurement methods, such as value-at-risk or expected- shortfall models, which “have proved necessary but inadequate and should be supplemented by forward-looking instruments such...

Through their open market operations, the trading desks at central banks gain first-hand knowledge of evolving stresses in the inter-dealer funding markets – information which can help to monitor systemic risks.

Bank for International Settlements: A first open question pertains to the governance structure and flow of information in systemic risk regulation. The crisis has shown that central banks play a decisive role in systemic regulation. But it is not entirely clear how central banks need to be equipped to play this role. Especially where the central bank is not the bank supervisor, it is important that the goal be well defined, the instruments understood and the exchange of information with other authorities appropriate - including detailed supervisory information on individual firms.  Financial supervisors can also benefit from information collected by central banks in the context of their liquidity operations.[1]

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Although much will be expected of regulators over the next several years, it is unlikely that their budgets will be enhanced commensurately. As a result, creative affiliations will be established with the private sector, to include in-house compliance professionals and external advisors. 

U.S. Securities and Exchange Commission: We have fewer...

Regulators intend to increase the flows of bilateral information so as to isolate sources of risk as well as the ability of market participants to improve their risk management and business models.

European Central Bank: Any well-functioning macro-supervisory framework needs the support of market participants, because a rigorous monitoring of...

European Central Bank: We have to succeed. At stake is not only the stability of one of the world’s largest financial systems, but also the support from the over 490 million citizens in the European Union who are watching our efforts very closely. We have counted very heavily on their support for the financial system, and they would not forgive us if...

IOSCO members wish to collect data and create risk profiles of hedge fund managers, in order to help assess systemic risk and "inform the relevant legislative debates."

"Systemic risk has to be identified and guarded against," agrees the Bundesbank, by finding "adequate measures for indicating economic stress." Preferably, these metrics would...