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AFP Reg Report: Tax Plans, MMFs and Basel III

  • By Konstantine Kastens, AFP Public Policy Analyst
  • Published: 3/6/2014

Recent regulatory developments relevant to treasury and finance professionals are reviewed in the AFP Reg Report.

After a financial data breach swept major U.S. retailers over the winter holidays, cybersecurity regulation moved into the spotlight. Six congressional hearings were held in February on data security protections, and a wave of new and recycled bills were offered in both houses of U.S. Congress.   

In his webcasted weekly address, U.S. Attorney General Eric Holder called for lawmakers to pass a national customer notification system that would enable the Justice Department “to better investigate these crimes—and hold compromised entities accountable when they fail to keep sensitive information safe.”  Upon request from President Obama last year, the National Institute of Standards and Technology undertook and finalized the Framework for Improving Critical Cybersecurityon February 12, offering voluntary industry guidelines to protect against cyberattacks.

Changes to the U.S. rules governing money market mutual funds have been expected since last September when the Securities and Exchange Commission issued a two-part proposal for mark-to-market valuation of certain funds and/or redemption fees with delays during financial panic. Although deliberation has been kept silent, suggestions have been made that a finalized rule should be expected within the first half of the year.

In an early February speech, SEC Commissioner Michael Piwowar, a Republican appointment, showed support for the  SEC-proposed changes. He went further in a recent Wall Street Journal  interview, stating his preference for investor choice between a floating net asset value or redemption restrictions.  Meanwhile, recent-appointee Democratic SEC commissioner Kara Stein addressed the topic during a conference, saying that the proposed rules “do not go far enough to address systemic risks.”

EU lawmakers voted on February 17 to delay finalized approval of their own new rule changes to European-based money market funds. Offered up by the European Commission, EU’s executive body, the “Proposal for a Regulation of the European Parliament and of the Council on Money Market Funds” was submitted last September, and has since received considerable pushback from industry and investors.

The EU rules are more restrictive, placing limits on eligible investment assets and requiring a capital buffer of 3 percent of the asset value to absorb losses—among other changes. Through a 23 to 15 committee vote, the European Parliament’s Economic and Monetary Committee (ECON) resolved to vote on finalization on March 10.  With no result by then, a compromise becomes all the more complicated by the caveat that European parliamentary elections take place in May, which with a new Parliament, could stifle any previous gain.

During an early February U.S. Senate Banking Committee hearing, top bank regulators from the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation affirmed swift enforcement of Basel III leverage-ratio requirements. This is in response to the Basel Committee on Banking Supervision issuing a technical framework for calculating limits. Implementation of Basel III, while long-awaited, has some banks and corporate clients concerned about the impact that stricter bank ratio requirements will have on business.

Last fall, the Federal Reserve issued a consultation paper seeking public comment on approaches to modernizing the U.S. electronic payments system, which AFP responded to. The Fed indicated that it received close to 200 responses from non-banks and expressed that a faster U.S. payment system is now on firmer footing.

New swap reporting requirements for Europe-operated businesses took effect on February 12. The European Securities and Market Authority (ESMA) required that under the European Market Infrastructure Regulation, or EMIR, all parties to an over-the-counter derivatives transaction report their trade with a designated repository. Unless conditions apply, reporting compliance extends to corporate end-users who otherwise fail to arrange either their counterparty or a third-party do so on their behalf.  

Many companies are uncertain whether their trades fall under reporting requirements. Just after EMIR took effect, industry confusion led ESMA to write a letter to the European Commission seeking clarification on derivative definitions. Meanwhile, European corporates are rushing to backlog and tag transactions with unique trade identifiers, despite insufficient regulatory guidance.  

With the Volcker Rule now U.S. law, having reached approval from the five supervising regulators last December, its integration into bank practices has hit bumps. Just after passage, the rule—which bans federally-insured banks from proprietary trading and hedge fund ownership—received an exemption for certain bundled debt instruments only if backed by trust-preferred securities. In February, the focus shifted to collateralized loan obligations, or CLOs. Concerns were raised during a U.S. House Financial Services Committee hearing with Federal Reserve governor Daniel Tarullo. Committee members cited that CLOs, which are pooled loans to low-rated businesses, do not meet criteria for banned investment funds.

The issue arises because, while CLO assets are predominantly comprised purely of loans, most CLOs are able to invest in bonds and many legacy CLOs in fact do so – which constitute them as ‘covered funds.’  These ‘covered funds’ are treated as hedge funds, thereby prohibited under the Volcker Rule. Democratic members of the House Financial Services Committee put regulators on notice about their concern, while the Republican chair of the panel, Jeb Hensarling of Texas, held a hearing on it February 26. Enforcement compliance is not scheduled to take effect until July 21, 2015.

Long-awaited tax overhaul legislation offered by U.S. House Ways and Means Committee Chairman Dave Camp (R-MI) was released in late-February. Camp delivered provision-by-provision specifics for a plan he calls revenue neutral that lowers the corporate tax rate from its current 35 percent highest bracket to 25 percent, offset through repeal of a whole host of preferential tax expenditures.  The Camp plan moves the U.S. international tax system toward a territorial system, where repatriated overseas profits would receive a 95 percent tax exemption and already accumulated profits would be taxed under a one-time rate of 8.75 percent.

In early March, President Obama submitted the White House 2015 budget plan to Congress, outlining his own tax proposal. His plan calls for $276 billion in revenue from overseas corporate profits—just over twice the amount of revenue of previous budgets—and brings the corporate tax rate to 28 percent. The proposal slashes many of the same tax preferences repealed under the Camp plan. Neither plan has the congressional votes needed for passage, but both plans are expected to offer guidance to address what most in Washington generally agree to be a broken, outdated tax system.

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