Week InReview | OFR financial stability report: 'Credit risks are elevated'| Basel Committee eyes risk to banks posed by asset managers | Compromise cyber bill excludes 'regulatory' language opposed by banks | ICYMI + Binge Reading

Friday, December 18, 2015

Let's recap

In case you missed it . . .

CFTC Approves Rule Giving Wall Street Break on Billions in Swaps (12/16)

The Best Way to Inside Trade: Unlisted Derivatives Outside U.S. (12/16)

Behind the Crazy-Complicated Link Between Wall Street & the Fed: It stems from the 1913 Federal Reserve Act (12/16)

This Is a Test of the Shadow Banking System: Turmoil in debt markets offers insight into what's good, and what's not (12/15)

Meanwhile in Germany, 'Zittern vor dem Bond-Tsunami' ('Tremors Before the Bond Tsunami') | Google Translate or Google Translate Chrome required (12/15)

'Credit risks are elevated and rising'

OFR financial stability report

(Dec 15) "Credit risks are elevated and rising for U.S. nonfinancial businesses and many emerging markets," according to the Office of Financial Research's 2015 financial stability report.

'Market liquidity appears to be episodically fragile in major U.S. financial markets, diminishing sharply under stress'
'Run and fire-sale risks persist in securities financing markets'
While U.S. credit-market distress has been limited to low-rated debt issuers and energy and commodity industries, 'that distress may spread, because investors now appear to be reassessing the credit and liquidity risks in these markets'
'Interconnections among financial firms are evolving in ways not fully understood, for example, in the growing use of central clearing'
'Enhanced capital and leverage requirements have made banks more resilient, but they also can have unintended consequences,' including that they 'may increase incentives for risk-taking by large, complex banking firms'

Risk to banks posed by asset managers

Now under Basel Committee scrutiny

(Dec 17) The Basel Committee on Banking Supervision has proposed approaches to tackling step-in risks to banks posed by asset management entities and funds.

BCBS: 'During the financial crisis between 2007 and 2008, certain money market funds received support from their sponsor or sponsor's parent company when the sponsor or its parent was not legally obligated to do so. The presumption that a bank may be compelled to 'step in' has led the committee to consider how funds under management should be considered in the framework.'
BCBS proposals on asset managers are part of broader proposals for 'identifying, assessing and addressing step-in risk potentially embedded in banks' relationships with shadow banking entities.' The proposals 'only apply to unconsolidated entities, that is to say entities that, as of today, are out of the regulatory scope of consolidation.'
Applying the proposed rules would help to identify cases when a bank might step in to support an unconsolidated asset management company or fund, BCBS says. 'This holds true for cases where the banking group provides relevant credit enhancement to a fund or where it is the only or the major liquidity provider.'
Banking groups that own asset managers should assess whether they would step in to support 'unconsolidated funds under its management as an exceptional measure,' BCBS says.
BCBS seeks feedback on approaches to asset management that include:
- 'Consolidate the unconsolidated asset management company because of capital ties or that its external credit rating is based on the bank's own rating';
- 'Based on the sponsoring indicators applicable to funds, applying a conversion approach to the assets under management. In which case, the conversion approach described above might apply to for example 1% of the total assets of the fund';
- 'Based on the sponsoring indicators outlined above (i.e. performance guarantees, explicit commitments to meet any shortfalls in returns or relevant interests in the fund other than its management fee), the banking group should consider its relationship with such funds. This would reflect the fact that the group is providing a guarantee of the value of the assets of the fund and so has the obligation to provide such support to the entity when the value of its assets falls. In which case, the conversion approach described above might apply to for example 1% AUM.'

Lawmakers reach compromise cyber bill

Excludes 'regulatory' language opposed by banks

(Dec 16) House and Senate negotiators reached an agreement on cyberthreat data sharing legislation that includes a 10-year sunset provision and leaves out language that industry groups feared would lead to increased regulation. The Senate in October passed a cybersecurity bill (S. 754) that conflicted with similar legislation (H.R. 1560, H.R. 1731) from the House. Lawmakers worked behind the scenes, without a formal conference process, to negotiate a final bill that could reach President Barack Obama's desk before Christmas. The compromise proposal was attached to the year-end omnibus spending package.

Binge reading disorder

Hand-curated, chosen with love

What Does It Take to Become Best in Show? (Atlas Obscura)

A Pessimist's Guide to the World in 2016 (Bloomberg Business)

Insider Gift Tips for the Trader in Your Life (Bloomberg View)

A Mansion, a Shell Company and Resentment in Bel Air: In the booming high-end market of Los Angeles, where hidden ownership is common, one house stands out (The New York Times)

57 Inspirational Quotes From 'Star Wars' and George Lucas - This wisdom from a long time ago in a galaxy far, far, away will inspire you to be thoughtful, brave, and successful (Inc.)

Transparency.

Inclusiveness.

Consensus.