Recent regulatory developments relevant to treasury and finance professionals are reviewed in the AFP Reg Report. In this issue: Cyberthreat data sharing legislation, the SEC MMF reform stalemate and the Fed’s push for a new U.S. payments network.
Towards the end of June, the Senate Intelligence Committee will take up a cybersecurity information-sharing draft bill, introduced by the committee’s two ranking members, Chairwoman Dianne Feinstein (D-CA) and Vice-Chairman Saxby Chambliss (R-GA). The bill aims to encourage cyberthreat data sharing among the private sector and government by removing legal obstacles and providing liability protection for companies that exchange information.
The U.S. House of Representatives is expected to vote on H.R. 4413, the Customer Protection and End-User Relief Act on June 23, which reauthorizes U.S. Commodity Futures Trading Commission (CFTC) funding through 2018 with changes to rules governing the over-the-counter (OTC) derivatives market. The bill authorizes $218 million to the CFTC, a $3 million increase—and $62 million less than the agency requested. It also clarifies exemptions to certain requirements for nonfinancial end-users who use OTC derivatives to hedge against risk for their businesses. Having cleared the House Agriculture Committee with unanimous support, H.R. 4413 is in its final hurdle in the House Rules Committee before being taken up for a floor vote.
Timothy Massad was sworn in as CFTC chairman, along with two other new commissioner appointments to the panel. Stanley Fischer, former Bank of Israel governor, was sworn in to serve as vice chairman of the Federal Reserve Board, joined by incoming board governor Lael Brainard, who previously served as a senior official at the Treasury Department.
The SEC’s pursuit to overhaul money market funds continues toward an extended period of stalemate. One year ago this month, the SEC unveiled a two-option proposal to backstop money market funds from potential runs: either require institutionally-invested prime funds to shed their fixed $1 value and float valuation to market-value, or impose fund redemption delays during periods of stress.
News outlets suggest expected finalization of the SEC proposal is now pushed back to fall. Reaching a final consensus on rule changes has been slowed by disagreements between the panel’s two new newest commissioners, Kara Stein and Michael Piwowar, according to a Wall Street Journal report.
In remarks, Stein, a Democrat, raised concern about the complexity of questions still unresolved before a final commission vote. Specifically to the proposal of fees and gates, she questioned, “couldn’t this trigger pre-emptive runs by investors that otherwise would not have occurred? Or will fees and gates reduce run risk?...And what happens to the borrowers when the money fund providing their short-term financing slams its gate down?” Meanwhile, Republican Piwowar is at odds with the remaining three commissioners on their support for a combination of the two proposals.
The Financial Times reported that Fed officials were considering the use of exit fees for corporate bonds to address fire sale concerns in the event that interest rates are raised. Fees and gates have been a widely-discussed approach to curbing money market fund redemption risks. Only two months prior to the FT report, the Fed released its own study on fees and gates, concluding that their implementation could rather trigger a preemptive run. When asked during the June Federal Open Market Committee press conference about purported exit fee talks at the central bank, Fed Chair Janet Yellen dismissed the rumor, noting that authority to do so resides exclusively within the SEC.
In early May, the Financial Stability Oversight Council (FSOC) released its annual report, outlining financial market developments and systemic vulnerabilities. The report reiterated many concerns previously issued by the panel, including potential runs on money market funds and other short-term lending markets. Noteworthy in the report was the growing threat of cyberattacks on financial markets.
The FSOC held a public conference on May 13 regarding whether to treat certain asset management firms as systemically-risky—thereby assigning them to Fed prudential supervision. Treasury’s domestic finance secretary, Mary J. Miller, who announced her intent to step down in early June, opened the meeting by suggesting it may yet be too early to know whether asset management needs special oversight.
Banking regulators have been pushing to introduce enhanced capital standards for wholesale funding markets, including money market funds, repurchase agreements and extending into other securities financing transactions. Should FSOC choose to designate asset management under Fed supervision, many investment vehicles could face stricter bank-like capital requirements. The prospect of FSOC intervention into capital markets has set off a backlash from SEC commissioners who see the move as an intrusion upon their regulatory jurisdiction.
The U.S. payments system may soon be overhauled to a more secure, faster real-time processing network. Fed officials are preparing a five-year infrastructural plan that will focus on security improvements in transaction validation and authentication with real-time payment capabilities. In the coming months, Fed officials intend to work with industry stakeholders—pointedly nonfinancial entities—to evaluate the future of payments and map out a course for building a new system.