Week InReview | Asset allocation is about to get more difficult | "Not so big financial secrets" at ECB HQ | CFTC subcommittee: Clearinghouses should stress default liquidity | DOL fiduciary rule's "mixed effect" on asset managers | Treasury pushes back on House legislation | Clawbacks may be way to bypass fee-waiver scrutiny | ICYMI + Binge Reading Disorder
Friday, November 6, 2015
Let's recap
In case you missed it . . .
(Nov 4) At the European Central Bank's new $1.4 billion headquarters in Frankfurt, a partially submerged fin has appeared in black marker next to a window in the atrium with an annotation reading: "A small financial shark." A tiny hand-sketched arrow points to a door concealed in the wall. "Not so big financial secrets behind this door," says the scrawled script. Vandalism it isn't, nor a creeping revolt against the ECB President.

(Nov 4) If this 83-year-old billionaire is right, one of the most important lessons of business school is pretty much wrong. All that stuff about focusing on shareholders? Forget it, says Kazuo Inamori, entrepreneur, management guru and Buddhist priest. Spend your time making staff happy instead.

(Nov 2) Changing global demographics could destroy one of the most popular ideas in portfolio management. Portfolio managers who adhere to a method of asset allocation that has served them well for more than three decades may be in need of a wake-up call. The warning comes as a number of prominent economists are arguing that a demographic sea change threatens to foster rising interest rates, reduced inequality, and stronger wage growth around the globe.

(Nov 1) A government-led initiative to test communication and coordination between global financial institutions will not be a "war game" involving live testing. It will instead check communication and coordination links between governments, authorities and companies. While it will involve financial firms, it will not test their individual responses. Further details should be released in the next couple of weeks. 

(Oct 30) the Department of Labor's fiduciary rule could send $1 trillion in new assets to passive investment products, say Morningstar analysts. Such a rule would have broad impacts on brokerage firms, index companies and asset managers if more money moved into digital investment platforms and by changing behavior by financial advisers. It could be a boon for some firms, but such a rule could have a "mixed effect" on other asset managers and distributors of financial products.
House committee approves slate of FSOC bills 
Would alter council's ability to make SIFI designations
(Nov 4)) The House Financial Services Committee approved a slate of legislation that would affect the Financial Stability Oversight Council's operations and its ability to make "systemically important financial institution" designations. The bills would generally subject FSOC to addiitonal procedural requirements, including more notice to potential SIFIs, more congressional oversight, and more input from member agencies in FSOC matters. Treasury Secretary Jacob Lew, who leads FSOC, pushed back on the legislation in a Nov. 2 letter to Congress, saying the proposals would be a "big step backwards for regulatory tools."
Clearinghouses should stress default liquidity
Says CFTC market risk advisory subcommittee
(Nov 2) Derivatives clearinghouses should prepare for the possibility that the default of a "significant" member also could result in the loss of key services to the central counterparty, including liquidity, macro-hedging strategies and settlement and custodial arrangements. The Commodity Futures Trading Commission Market Risk Advisory Committee's CCP Risk Management Subcommittee also suggested that in stress tests, clearinghouses should be liquid enough to meet obligations if a large member defaults. It reasoned that clearinghouses "may depend on their largest clearing members for an array of products and activities that are also essential to the functioning of the default management process." Central counterparties "should demonstrate that they have access to sufficiently diverse liquidity resources that are highly reliable in extreme but plausible market conditions," the subcommittee advised.
Clawbacks may be way to bypass fee-waiver scrutiny
Could show IRS that a partner has risk of loss
(Nov 2) Clawbacks could show IRS that a partner has risk of loss in an arrangement. Private equity firms could implement more provisions to demonstrate entrepreneurial risk. Provisions that require general partners to give back money if a private equity fund doesn't have enough net profits could be a good argument to the government that a compensation agreement has substantial entrepreneurial risk. "A good, strong clawback arrangement that requires the GP to return money if there aren't enough net profits to cover the fund is almost a get-out-of-jail-free card," Craig Gerson, a partner at PricewaterhouseCoopers LLP, said Nov. 2 at an American Institute of CPAs conference. Gerson was an attorney-adviser specializing in partnerships at Treasury Department's Office of Tax Legislative Counsel until about two months ago.
Binge reading disorder
Hand-curated, chosen with love
  • Bubbles: No One Has Any Idea What's Going On (Motley Fool)
  • Inside the Secretive World of Tax-Avoidance Experts (The Atlantic)
  • Everything you think you know about happiness is wrong (Quartz)
Transparency.
Inclusiveness.
Consensus.