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45 posts on "Regulation"

September 26, 2017

The Treasury Market Practices Group: A Consequential First Decade



LSE_2017_The Treasury Market Practices Group: A Consequential First Decade

The Treasury Market Practices Group (TMPG) was formed in February 2007 in response to the appearance of some questionable trading practices in the secondary market for U.S. Treasury securities. (A history of the origins of the TMPG is available here.) Left unaddressed, the practices threatened to harm the efficiency and integrity of an essential global benchmark market. The Group responded by identifying and publicizing “best practices” in trading Treasury securities—a statement of behavioral norms intended to maintain a level and competitive playing field for all market participants. The Group’s focus expanded in 2008 to include market architecture issues, and again in 2010 to include the federal agency debt and mortgage-backed securities (MBS) markets.

Continue reading "The Treasury Market Practices Group: A Consequential First Decade" »

Posted by Blog Author at 7:00 AM in Regulation, Treasury | Permalink | Comments (0)

August 02, 2017

Were Banks Ever ‘Boring’?



LSE_Were Banks Ever ‘Boring’?

In a previous post, I documented that much of the expansion into nontraditional activities by U.S. banks began well before the passage of the Gramm-Leach-Bliley Act in 1999, the legislation that repealed much of the Glass-Steagall Act of 1933. The historical record actually contains many prior instances of the Glass-Steagall restrictions being circumvented, with nonbank firms allowed to operate as financial conglomerates and engage in activities that go beyond traditional banking. These broad industry dynamics might indicate that the business of banking tends to expand firm boundaries beyond a
traditional—“boring”—perimeter.

Continue reading "Were Banks Ever ‘Boring’?" »

Posted by Blog Author at 7:00 AM in Banks, Financial Institutions, Regulation | Permalink | Comments (2)

July 31, 2017

Were Banks ‘Boring’ before the Repeal of Glass-Steagall?



LSE_Were Banks ‘Boring’ before the Repeal of Glass-Steagall?

Since the global financial crisis and Great Recession, many critics have called for regulatory and legislative reforms to restore a system of “boring” banks constrained to traditional banking activities like deposit taking and lending. The narrative underlying this argument holds that the partial repeal of the Glass-Steagall Act in 1999 by the Gramm-Leach-Bliley Act enabled banks to expand into nontraditional activities such as securities trading and underwriting, thereby contributing to the financial crisis some ten years later. The implication is that if we could restore the Glass-Steagall Act, banks would become boring once again, and financial stability would be enhanced. The reality, however, may be more complex; an in-depth look “under the hood” of banks’ organizational structure over the past forty years shows that bank holding companies (BHCs) began expanding into those financial activities in the early 1980s and that this expansion was, in fact, nearly complete by 1999.

Continue reading "Were Banks ‘Boring’ before the Repeal of Glass-Steagall?" »

Posted by Blog Author at 7:00 AM in Banks, Financial Institutions, Regulation | Permalink | Comments (3)

May 12, 2017

At the N.Y. Fed: The Evolution of OTC Derivatives Markets



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The 2007-09 financial crisis highlighted weaknesses in the over‑the‑counter (OTC) derivatives markets and the increased risk of contagion due to the interconnectedness of market participants in these markets. As a response, the global regulatory community introduced a number of reforms to both the market structure and the regulatory environment. The intent of these innovations was to improve the functioning of OTC markets but some market participants have suggested that some of the new regulations may have had unintended consequences. In this post, we discuss some key takeaways from a recent two-day conference on “Over‑the‑Counter Derivatives and Recent Regulatory Changes,” where policymakers, academics, practitioners, and other experts convened to discuss the evolution of OTC derivatives markets after the crisis.

Continue reading "At the N.Y. Fed: The Evolution of OTC Derivatives Markets" »

March 20, 2017

Money Market Funds and the New SEC Regulation



LSE_2017_Money Market Funds and the New SEC Regulation

On October 14, 2016, amendments to Securities and Exchange Commission (SEC) rule 2a-7, which governs money market mutual funds (MMFs), went into effect. The changes are designed to reduce MMFs’ susceptibility to destabilizing runs and contain two principal requirements. First, institutional prime and muni funds—but not retail or government funds—must now compute their net asset values (NAVs) using market-based factors, thereby abandoning the fixed NAV that had been a hallmark of the MMF industry. Second, all prime and muni funds must adopt a system of gates and fees on redemptions, which can be imposed under certain stress scenarios. This post studies the effect of the amendments on the size and composition of the MMF industry and, in particular, whether MMF investors shifted their assets from prime and muni funds toward government funds in anticipation of the tighter regulatory regime.

Continue reading "Money Market Funds and the New SEC Regulation" »

January 09, 2017

Trends in Arbitrage-Based Measures of Bond Liquidity



LSE_2017_arbitrage_boyarchenko_460_art

Corporate bonds are an important source of funding for public corporations in the United States. When these bonds cannot be easily traded in secondary markets or when investors cannot easily hedge their bond positions in derivatives markets, the issuance costs to corporations increase, leading to higher overall funding costs. In this post, we examine recent trends in arbitrage-based measures of liquidity in corporate bond and credit default swap (CDS) markets and evaluate potential explanations for the deterioration in these measures that occurred between the middle of 2015 and early 2016.

Continue reading "Trends in Arbitrage-Based Measures of Bond Liquidity" »

Posted by Blog Author at 7:00 AM in Financial Markets, Regulation, Treasury | Permalink | Comments (1)

December 05, 2016

Are All CLOs Equal?



Asset securitization is an important source of corporate funding in capital markets. Collateralized loan obligations (CLOs) are securitization structures that allow syndicated bank lenders and bond underwriters to repackage business loans and sell them to investors as securities. CLOs are actively overseen by a collateral manager that has the responsibility to trade loans in the portfolio to benefit from gains and mitigate losses from credit exposures. Because CLOs include a diverse portfolio of loans, a single firm that commingles its lending role with the collateral management role can reap information advantages stemming from its “originate-to-distribute” activities.

Continue reading "Are All CLOs Equal?" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets, Regulation | Permalink | Comments (3)

November 18, 2016

The Final Crisis Chronicle: The Panic of 1907 and the Birth of the Fed



LSE_The Final Crisis Chronicle: The Panic of 1907 and the Birth of the Fed

The panic of 1907 was among the most severe we’ve covered in our series and also the most transformative, as it led to the creation of the Federal Reserve System. Also known as the “Knickerbocker Crisis,” the panic of 1907 shares features with the 2007-08 crisis, including “shadow banks” in the form high-flying, less-regulated trusts operating beyond the safety net of the time, and a pivotal “Lehman moment” when Knickerbocker Trust, the second-largest trust in the country, was allowed to fail after J.P. Morgan refused to save it.

Continue reading "The Final Crisis Chronicle: The Panic of 1907 and the Birth of the Fed" »

November 09, 2016

Performance Bonds for Bankers: Taking Aim at Misconduct



LSE_Performance_bonds_for_bankers_iStock_671704_460x288

Given the long list of problems that have emerged in banks over the past several years, it is time to consider performance bonds for bankers. Performance bonds are used to ensure that appropriate actions are taken by a party when monitoring or enforcement is expensive. A simple example is a security deposit on an apartment rental. The risk of losing the deposit motivates renters to take care of the apartment, relieving the landlord of the need to monitor the premises. Although not quite as simple as a security deposit, performance bonds for bankers could provide more incentive for bankers to take better care of our financial system.

Continue reading "Performance Bonds for Bankers: Taking Aim at Misconduct" »

October 21, 2016

From the Vault: Funds, Flight, and Financial Stability



The money market industry is in the midst of significant change. With the implementation this month of new Securities and Exchange Commission rules designed to make money market funds (MMFs) more resilient to stress, institutional prime and tax-exempt funds must report more accurate prices reflecting the net asset value (NAV) of shares based on market prices for the funds’ asset holdings, rather than promising a fixed NAV of $1 per share. The rules also permit prime funds, which invest in a mixture of corporate debt, certificates of deposit, and repurchase agreements, to impose fees or set limits on investors who redeem shares when market conditions sharply deteriorate. (Funds investing in government securities, which are more stable, are not subject to the new rules.) These changes, driven by a run on MMFs at the height of the financial crisis, add to earlier risk-limiting rules on portfolio holdings.

Continue reading "From the Vault: Funds, Flight, and Financial Stability" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets, Regulation | Permalink | Comments (1)
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