by T. GormanPosted on Posted in SECActions

A new Special Study of the Capital Markets should be undertaken, according to SEC Commissioner Michael Piwowar. Specifically, “we should commence – in short order – a comprehensive, multi-year equity market structure review program . . .” This will permit us to “set our sights on ensuring that the U.S. securities markets remain a world leader in market quality, efficiency, and fairness, which in turn will fuel global capital formation and economic growth,” according to the Commissioner. Michael Piwowar, “The Benefit of Hindsight and the Promise of Foresight: A Proposal for a Comprehensive Review of Equity Market Structure,” London, England (Dec. 9, 2013)(here).

The last comprehensive study of the securities market began in 1961. It was a five part, thirteen chapter comprehensive review of the securities market. The report was prepared by a group which included the SEC staff and individuals drawn from the private practice of law, academia and industry. A portion of that report analyzes the “market break” on May 28, 1962 which caused gyrations in the markets similar to those of the more recent flash crash of May 6, 2010. The Special Study analyzed the events of May 1962 not just on the day of the break but in the context of the overall markets.

Since the completion of the Special Study a comprehensive analysis of the markets has not been completed. Following the Flash Crash of May 2010 the SEC staff did complete a report. It was, however, a detailed analysis of the events of the Flash. In addition, the SEC has “effectively abandoned” its 2010 Concept Release on Equity Market Structure, according to the Commissioner.

The new study would focus on three key points:

Evolution: The first step would be to “explore how it is that our equity markets have evolved to where we are now . . . For example, we must question whether the market fragmentation and intermediation that many now decry as disadvantaging retail customers may be directly attributable to Regulation NMS,” although this should not be viewed as an effort to simply roll back regulation.

Incentives: The focus would not be on abstract market structure concepts or high frequently traders. “Rather, we should ask what incentives underlie the current market structure. What drives the supposed ‘need-for-speed?’”

Choices: Once the underlying incentives are identified “we can then make choices about which alternatives may best facilitate competition on choice, pricing, and innovation.”

Critical to this undertaking is to obtain the “views and perspectives of the public to inform any market structure debate. This is where the SEC will benefit to the utmost degree from data and research.”

While this study will take months to complete, Commissioner Piwowar made it clear that he wants to move forward with “modest” reforms now. These can include items such as “a pilot program on increasing the tick size for small capitalization companies.” Implementing programs such as this will permit the Commission to move forward while conducting the study.

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by T. GormanPosted on Posted in SECActions

Five federal regulatory agencies — the SEC, CFTC, the Board of Governors of the Federal Reserve System, the Office of the Comptroller and the FDIC — implemented the 900 plus page Volcker Rule. Many consider the Volker Rule to be the center piece of the Dodd-Frank Wall Street Reform Act.

The final rules generally prohibit banking entities from engaging in short term proprietary trading in securities, derivatives, commodity futures and options on these instruments for their account. The rules also prohibit banking entities from owning, sponsoring or having certain relationships with what are called “covered funds,” essentially hedge or private equity funds. The rules apply to insured depository institutions and their affiliates.

Critical to the Rule are certain definitions and exemptions, including:

Underwriting: There is an exemption for underwriting activities for a distribution of securities.

Market making: Another exemption is provided for market making and related activities. To qualify for the exemption the inventory of the trading desk would have to be designed not to exceed the expected near term demand.

Hedging: Hedging activity which is designed to reduce, and demonstrably reduces or mitigates, identifiable risks of individual or aggregated positions are exempt. The institution would have to conduct an analysis of its strategy and periodically calibrate it.

Government securities: The rules also permit proprietary trading in U.S. government, agency, state and municipal obligations.

Foreign banks: Foreign banks are exempt from the rules if the trading decisions and principal risks of the foreign banking entity occur, and are held outside, the U.S.

Hedge and private equity funds: The rules prohibit the ownership of “covered funds,” that is, hedge and private equity funds and their affiliates. Essentially, these funds are issuers that are an investment company under the Investment Company Act if it would not be excluded under certain provisions.

Compliance: Generally banking entities are required to establish an internal compliance program reasonably designed to ensure and monitor compliance with the rules. Larger institutions have more detailed requirements, including a CEO attestation. Banking entities are also required to maintain records which can be monitored.

Despite two years of work, the final rules were not implemented without controversy. At the SEC, for example, Chair Mary Jo White favored the Rule calling it “central to the framework put in place by the Dodd-Frank Act . . . The final rule has been written to carry out these objective [to prevent risks to U.S. taxpayers that can flow from proprietary trading] while maintaining the strength and flexibility of the U.S. capital markets by allowing both domestic and foreign financial firms to continue to participate meaningfully in those markets . . .” Similarly, Commissioner Luis Aguilar noted that “[t]oday’s adoption [of the Rule] is a step forward in reining in speculative risk-taking by banking entities and preventing future crises.”

In contrast, Commissioner Daniel Gallagher dissented, arguing that the rules would impose enormous costs at a time when the economy is still in recovery. He went on to note that the “Volker rule is being finalized in the shadow of perhaps the greatest display of governmental hubris in our lifetimes, as millions of Americans struggle to navigate the unprecedented disaster arising from governmental intrusion into our health care system.” Commissioner Michael Piwowar also dissented, arguing that the rules should be re-proposed to give adequate notice and that the agencies “failed both at the proposing and adopting stages to prepare an economic or other regulatory analysis . . .”

The final rule becomes effective April 1, 2014. The Federal Reserve has extended the conformance period until July 21, 2015.

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