Week InReview | Shadow regulators. Can stable markets turn on a dime?  Money-market rules' unintended consequences. A Craigslist for bond traders. Liquidity, adversity, and risk... oh my!
Friday, March 20, 2015
FSOC part of a 'shadow regulatory system'?
Tell us how you really feel, Jeb
(Mar. 17) In the most provocative criticism of the Financial Stability Oversight Council since SEC Commissioner Michael Powowar referred to it as a "vast left-wing conspiracy" last year, Committee Chairman Jeb Hensarling, at a House Financial Services hearing on international finance, said that FSOC and the Financial Stability Board (FSB) "wield immense power over our global economy and operate largely without transparency or accountability as part of a shadow regulatory system."
'Quicksilver Markets'
When a stable market turns on a dime
(Mar. 17) The U.S. Treasury's Office of Financial Research (OFR) released a study stating that by three separate measures the U.S. stock market is approaching "two-sigma thresholds" which can lead to "quicksilver markets." A two-sigma threshold is when market valuation metrics move at least two standard deviations above the historical mean. The study notes that "valuations approached or surpassed two-sigma in each major stock market bubble of the past century." A quicksilver market, as defined by the study, is when stable markets turn on a dime and "change rapidly and unpredictably."
Money-market funds
As safe as banks, except when they're not
(Mar. 16) Regulators have tried to make money-market funds -- for 40 years one of the world's most popular investment products -- safer since September 2008, when Reserve Primary Fund, the oldest U.S. money-market fund collapsed and caused a widespread run on funds and helped freeze global credit markets. After years of debate, the SEC in 2014 passed a set of rules aimed at making the funds safer without destroying their utility to investors and borrowers. The rules are weaker than its original proposals, which had been backed by the Treasury and the Fed but ran into fierce industry opposition. Some critics think the SEC back down so much that it has failed to build a firewall between the funds and the rest of the economy. Some in the industry say the unintended consequences are just beginning to be felt.
Bond market liquidity may depend on a few large asset managers
A cautionary tale from the BIS
(Mar. 18) Just a handful of asset managers could drive how fixed interest markets react during another financial crisis, the Bank for International Settlements has cautioned in its latest quarterly review. BIS asserts that while the new-issue bond market is expanding and assets under management of investment funds that promise daily liquidity are growing rapidly, bond markets are concentrating "as key participants, such as asset managers, shrink in number but expand in size." The report adds that "as a result, market liquidity may increasingly come to depend on the portfolio allocation decisions of only a few large institutions. And, more broadly, investors may find that liquidating positions proves more difficult than expected, particularly in the context of an adverse shift in market sentiments."
A Craigslist for mortgage bond traders?
New options for investors in the works
(Mar. 17) In the latest initiative to combat the reduced liquidity in debt markets, Empirasign Strategies LLC started testing a service, similar to Craigslist's online classified ads, which would allow investors to anonymously post securities they want to buy or sell, along with potential prices, and then chat online without divulging their names to seal the deals.
Transparency. Inclusiveness. Consensus.