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Some comments on systemic risk and Dodd


Some comments on systemic risk and Dodd Frank Act: Wall Street Reform and Consumer Protection Act by Krzysztof Ostaszewski Dodd-Frank issues U.S. Treasury ... – PowerPoint PPT presentation

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Title: Some comments on systemic risk and Dodd

Some comments on systemic risk and DoddFrank
Act Wall Street Reform and Consumer Protection
  • by
  • Krzysztof Ostaszewski

Systemic Risk
  • The crisis of the Fall of 2008 was presented
    widely as an extreme case of systemic risk
    problem One financial institution linked so
    widely and so greatly to others and to the
    economy in general that it can bring the whole
    economy down with its failure.
  • Yet U.S. financial regulation disintegrated SEC,
    Federal Reserve, FDIC, OTS, Department of Labor
    supervision of pensions, state insurance

New systemic risk agencies
  • EU European Systemic Risk Board established
    December 16, 2010. European Central Bank is its
    parent agency.
  • USA Financial Stability Oversight Council,
    formed July 21, 2011. Headed by Secretary of
    Treasury, but technically not a subsidiary of the
    Department of Treasury.
  • Did integrated financial supervision perform
    better in this crisis?

The Last Fairy Tale
  • When my daughter Angelica was little, we read her
    fairy tales to put her to sleep. My wife did most
    of the work, I was studying for actuarial exams.
  • I noted that Angelica asked for more stories by
    asking The last one, please, the last one
  • When the feds saved creditors of Continental
    Illinois, of lenders to Latin America, or
    creditors of LTCM, it was always the last one.

Dodd-Frank Act
  • Signed into law by President Barack Obama on July
    21, 2010.
  • The law was initially proposed on December 2,
    2009, in the House of Representatives by Barney
    Frank, and in the Senate Banking Committee by
    Chairman Chris Dodd.

  • Title I - Financial Stability
  • Title II - Orderly Liquidation Authority
  • Title III - Transfer of Powers to the
    Comptroller, the FDIC, and the FED
  • Title IV - Regulation of Advisers to Hedge Funds
    and Others
  • Title V Insurance
  • Title VI - Improvements to Regulation
  • Title VII - Wall Street Transparency and
  • Title VIII - Payment, Clearing and Settlement

  • Title IX - Investor Protections and Improvements
    to the Regulation of Securities
  • Title X - Bureau of Consumer Financial Protection
  • Title XI - Federal Reserve System Provisions
  • Title XII - Improving Access to Mainstream
    Financial Institutions
  • Title XIII - Pay It Back Act
  • Title XIV - Mortgage Reform and Anti-Predatory
    Lending Act
  • Title XV - Miscellaneous Provisions
  • Title XVI - Section 1256 Contracts

Key issues in Dodd-Frank
  • Systemic risk oversight.
  • Supervision and liquidation of failed
    institutions that were considered to be out to be
    too big to fail in the past.
  • Regulatory restructuring and increased regulatory
  • Bureau of Consumer Financial Protection and other
    consumer protections.
  • The Volcker Rule. NOT.

Regulation of insurance in the United States
  • 1865 case Paul v. Virginia State regulation,
    because insurance is not commerce.
  • 1944 case U.S. v. Southeastern Underwriters
    Reverses Paul v. Virginia.
  • 1945 McCarran-Fergusson Act Federal government
    delegates insurance regulation to the states, but
    antitrust laws apply to insurance.
  • AIG debacle prompted federal regulation in

A New Foundation Original proposal by President
  • Consolidation of regulatory agencies, elimination
    of national thrift charter, and new oversight
    council to evaluate systemic risk.
  • Comprehensive regulation of financial markets,
    increased transparency of derivatives (bringing
    them onto exchanges).
  • Consumer protection reforms including a new
    consumer protection agency and uniform standards
    for "plain vanilla" products as well as
    strengthened investor protection.

Original proposal by President Obama continued
  • Tools for financial crises, including a
    "resolution regime" complementing the existing
    Federal Deposit Insurance Corporation (FDIC)
    authority to allow for orderly winding down of
    bankrupt firms, and including a proposal that the
    Fed receives authorization from the Treasury for
    extensions of credit in "unusual or exigent
  • Various measures aimed at increasing
    international standards and cooperation,
    including in this section were proposals related
    to improved accounting and tightened regulation
    of credit rating agencies.
  • The Volcker Rule added to the proposal in January

The Volcker Rule
  • Prohibits a bank or institution that owns a bank
    from engaging in proprietary trading that isn't
    at the behest of its clients, and from owning or
    investing in a hedge fund or private equity fund.
  • Limited the liabilities that the largest banks
    could hold.
  • Volcker Rule was added as an amendment to
    financial regulatory bill, but Senate refused to
    add it.
  • The House-Senate conference brought the Volcker
    Rule back, but allowed banks to invest in hedge
    funds or private equity funds (up to 3 of their
    Tier 1 capital), do proprietary trading in
    Treasury securities, bonds issued by Federal
    Government entities, such as FNMA and FHLMC, and
    municipal bonds.

The Act
  • The Act is categorized into sixteen titles and by
    one law firm's count, it requires that regulators
    create 243 rules, conduct 67 studies, and issue
    22 periodic reports.
  • The Act changes the existing regulatory
    structure, such as creating new agencies (while
    merging and removing others) with the objectives
    being streamlining the regulatory process,
    increasing oversight of specific institutions
    regarded as a systemic risk, amending the Federal
    Reserve Act, promoting transparency, and some

New agencies created
  • Financial Stability Oversight Council
  • Office of Financial Research
  • Bureau of Consumer Financial Protection.

Title I Financial Stability
  • Creates the Financial Stability Oversight Council
    and the Office of Financial Research.
  • Two new offices are attached to the Treasury
    Department, with the Treasury Secretary being
    Chair of the Council, and the Head of the
    Financial Research Office being a Presidential
    appointment with Senate confirmation.

Purposes of the Financial Stability Oversight
  • Identify the risks to the financial stability of
    the United States from both financial and
    non-financial organizations.
  • Promote market discipline, by eliminating
    expectations that the Government will shield them
    from losses in the event of failure.
  • Respond to emerging threats to the stability of
    the US financial system.

Membership of the Financial Stability Oversight
  • Secretary of the Treasury (chairs the Council)
  • Chairman of the Federal Reserve
  • Comptroller of the Currency
  • Director of the Bureau of Consumer Financial
  • Chairperson of the U.S. Securities and Exchange
  • Chairperson of the Federal Deposit Insurance
  • Chairperson of the Commodity Futures Trading
  • Director of the Federal Housing Finance Agency
  • Chairman of the National Credit Union
    Administration Board
  • Plus one independent member (with insurance
    expertise), appointed by the President, with the
    advice and consent of the Senate, for a term of 6

Nonvoting members of the Financial Stability
Oversight Council
  • Director of the Office of Financial Research
    (part of the Treasury Department and established
    in the Act) who is the Council's executive
  • Director of the Federal Insurance Office (part of
    the Treasury Department and established in this
  • One state insurance commissioner, to be
    designated by a selection process determined by
    the state insurance commissioners (2-year term)
  • One state banking supervisor, to be designated by
    a selection process determined by the state
    banking supervisors (2-year term)
  • One state securities commissioner (or officer
    performing like function) to be designated by a
    selection process determined by such state
    security commissioners (2-year term).

Resources of the Financial Stability Oversight
  • The Federal Advisory Committee Act, which limits
    the powers of advisory committees, does not apply
    to the Council.
  • The Council has an almost unlimited budget in
    that the Council may draw on virtually any
    resource of any department or agency of the
    Federal government.
  • An employee of the Federal Government detailed to
    the Council shall report to and be subject to
    oversight by the Council during the assignment to
    the Council, and shall be compensated by the
    department or agency from which the employee was

Authority of the Financial Stability Oversight
  • The Council has very broad powers to monitor,
    investigate and assess any risks to the US
    financial system.
  • The Council has the authority to collect
    information from any State or Federal financial
    regulatory agency, and may direct the Office of
    Financial Research to collect information from
    bank holding companies and nonbank financial
  • Under specific circumstances, the Chairman of the
    Council (Secretary of the Treasury), with the
    concurrence of 2/3 voting members, may place
    nonbank financial companies or domestic
    subsidiaries of international banks under the
    supervision of the Federal Reserve if it appears
    that these companies could pose a threat to the
    financial stability of the U. S.

Financial Reporting to the Council
  • The Council may require any bank or non-bank
    financial institution with assets over 50
    billion to submit
  • certified reports as to the companys financial
  • systems in place to monitor and control any risks
  • transactions with subsidiaries that are regulated
  • the extent to which any of the company's
    activities could have a potential disruptive
    impact on financial markets or the overall
    financial stability of the country

Office of Financial Research
  • Department within the Treasury.
  • Office is tasked with providing administrative,
    technical, budget analysis and other support
    services to the Council and its affiliated
  • Salaries in the Office do not have to follow
    standard government scale.
  • Office may request, from department or agency of
    the United States, "such services, funds,
    facilities, staff, and other support services as
    the Office may determine advisable.

Support for the Office
  • The Data Center, which collects, validates and
    maintains (and publishes some of) the data
    required to support the Council which may be
    obtained from commercial data providers, publicly
    available data sources and the financial entities
    supervised by state and Federal agencies and
  • The Research and Analysis Center, which conducts
    independent analysis of available information to
    identify financially destabilizing effects, and
    develops and maintains independent analytical
    capabilities and computing.

Title II Orderly Liquidation Authority
  • Liquidation authority
  • In General - FDIC and/or the Federal Reserve
  • Broker Dealers - SEC and/or the Federal Reserve
  • Insurance Companies Federal Insurance Office
    and/or the Federal Reserve

More Title II
  • When a financial institution is placed into
    receivership under these provisions, within 24
    hours the Secretary shall report to Congress, and
    within 60 days there shall be a report to the
    general public.
  • The report on the recommendation to place a
    financial company into receivership shall contain
    various details on the state of the company, the
    impact of its default on the company, and the
    proposed action.

Orderly Liquidation Fund
  • The Orderly Liquidation Fund is to be an
    FDIC-managed fund, to be used by the FDIC in the
    event of a covered financial company's
    liquidation that is not covered by FDIC or SIPC.
  • The method of capitalization is by collecting
    risk-based assessment fees on any "eligible
    financial company" - which is defined as any
    bank holding company with total consolidated
    assets equal to or greater than 50 billion and
    any nonbank financial company supervised by the
    Board of Governors."

Orderly Liquidation Authority Panel
  • Established inside the United States Bankruptcy
    Court for the District of Delaware, the Panel
    evaluates the conclusion of the Secretary of the
    Treasury that a company is in (or in danger of)
  • The Panel consists of three bankruptcy judges
    drawn from the District of Delaware, all of whom
    are appointed by the Chief Judge of the United
    States Bankruptcy Court for the District of

Orderly Liquidation Authority Panel
  • If the Panel concurs with the Secretary, the
    company in question is permitted to be placed
    into receivership.
  • If they do not concur, the Secretary has an
    opportunity to amend and refile his or her
  • In the event that a Panel decision is appealed,
    the United States Court of Appeals for the Third
    Circuit has jurisdiction in the event of further
    appeal, may be filed with the United States
    Supreme Court.

Title III - Transfer of Powers to the
Comptroller, the FDIC, and the FED
  • Abolishing the Office of Thrift Supervision and
    transferring its power over the appropriate
    holding companies to the Federal Reserve, state
    savings associations to the FDIC, and other
    thrifts to the Office of the Comptroller of the
    Currency. The thrift charter is to remain,
    although weakened.
  • The amount of deposits insured by the FDIC and
    the National Credit Union Share Insurance Fund is
    permanently increased from 100,000 to 250,000.
  • Each of the financial regulatory agencies
    represented on the Council shall establish an
    Office of Minority and Women Inclusion.

Title IV - Regulation of Advisers to Hedge Funds
and Others
  • Significant regulation of hedge funds, and other
    similar investment intermediaries for the first
    time, and is known severally as the "Private Fund
    Investment Advisers Registration Act of 2010.
  • In general, it increases the reporting
    requirements of investment advisors, and limits
    the ability of these advisors to exclude
    information in reporting to the various Federal
    government agencies. However, there is an
    exemption in reporting for Venture Capital Fund
    Advisors, certain advisors with assets under
    management under 150 million, and family offices
    (as defined by the Commission).

Title IV - Regulation of Advisers to Hedge Funds
and Others
  • The Act changes the definition of accredited
    investor, which means someone with personal or
    (joint with spouse) net worth over a 4-year
    period, that averages more than 1 million, to
    exclude the value of the person's residence from
    the calculation.
  • The Commission is allowed to adjust this value
    with time. The Act also provides that the SEC
    shall, every five years, adjust for the effects
    of inflation, that any factor used in rule or
    regulation be in multiples of 100,000.

Title V -- Insurance
  • Federal Insurance Office Act of 2010,
    establishes within the Department of the Treasury
    the Federal Insurance Office.

Federal Insurance Office tasks
  • Monitoring all aspects of the insurance industry
    (except health insurance, some long-term care
    insurance, and crop insurance).
  • Monitoring the extent to which traditionally
    underserved communities and consumers,
    minorities, and low-and moderate-income persons
    have access to affordable insurance (except
    health insurance).
  • Making recommendations to the Financial Stability
    Oversight Council about insurers.

Federal Insurance Office tasks
  • Administering the Terrorism Insurance Program.
  • Coordinating international insurance matters.
  • Determining whether State insurance measure are
    preempted by covered agreements (states may have
    more stringent requirements).
  • Consulting with the States (including State
    insurance regulators) regarding insurance matters
    of national.
  • importance and prudential insurance matters of
    international importance.

Title VI Improvements to Regulation
  • Introduces Volckers Rule, but not in full.
  • Limits banking entities to owning no more in a
    hedge fund or private equity fund than 3 of the
    total ownership interest.Total of all of the
    banking entitys interests in hedge funds or
    private equity funds cannot exceed 3 of the Tier
    1 capital of the banking entity.

Improvements to Regulation
  • The rule distinguishes transactions by banking
    entities from transactions by nonbank financial
    companies supervised by the Federal Reserve
  • Regulators are required to impose upon
    institutions capital requirements that are
    "countercyclical, so that the amount of capital
    required to be maintained by a company increases
    in times of economic expansion and decreases in
    times of economic contraction.

Title VII - Wall Street Transparency and
  • Regulation of over the counter swaps markets.
  • Requires that various derivatives known as swaps,
    which are traded over the counter be cleared
    through exchanges or clearinghouses.
  • Commodity Futures Trading Commission (CFTC) and
    the Securities and Exchange Commission (SEC) both
    regulate swaps under the Act, but the SEC has
    authority over "security-based swaps".

Title VII - Wall Street Transparency and
  • The regulators are required to consult with each
    other before implementing any rule-making or
    issuing orders regarding several different types
    of security swaps.
  • The Act repeals exemption from regulation for
    security-based swaps under the Gramm-Leach-Bliley

Title VII - Wall Street Transparency and
  • The title provides that, "Except as provided
    otherwise, no Federal assistance may be provided
    to any swaps entity with respect to any swap,
    security-based swap, or other activity of the
    swaps entity.
  • "Interagency Group" is constituted to the
    oversight of existing and prospective carbon
    markets to ensure an efficient, secure, and
    transparent carbon market, including oversight of
    spot markets and derivative markets.

Title VIII - Payment, Clearing and Settlement
  • Gives the Federal Reserve this task to create
    uniform standards for the management of risks by
    systemically important financial organizations in
    their payment, clearing and settlement activities.

Title IX - Investor Protections and Improvements
to the Regulation of Securities
  • To prevent regulatory capture within the SEC and
    increase the influence of investors, the Act
    creates an Office of the Investor Advocate, an
    Investor Advisory Committee composed of 12-22
    members of whom serve 4-year terms, and an
    ombudsman appointed by the Office of the Investor
  • The Investor Advisory Committee was actually
    created in 2009 and therefore predates the
    passage of the Act, but it is specifically
    authorized under the Act.

More on Title IX
  • SEC is specifically authorized to issue
    "point-of-sale disclosure" rules when retail
    investors purchase investment products or
    services these disclosures include concise
    information on costs, risks, and conflicts of
  • Subtitle A provides authority for the SEC to
    impose regulations requiring "fiduciary duty" by
    broker-dealers and investment advisers to their

Title IX, Subtitle B
  • Whistleblower bounty program which is based
    upon a similar program established by the IRS in
    2006 the program allows persons who provide
    information which leads to a successful SEC
    enforcement to receive 10 to 30 of the monetary
    sanctions over 1 million.
  • Allows the SEC to prohibit pre-dispute mandatory
    binding arbitration.

Title IX, Subtitle B
  • Exempts the SEC from disclosing information
    obtained pursuant to 17(b) of the Securities
    Exchange Act of 1934 or information "based upon
    or derived from" such information "obtained by
    the Commission for use in furtherance of the
    purposes of this title, including surveillance,
    risk assessments, or other regulatory and
    oversight activities" - meaning information
    derived from examinations.

Title IX, Subtitle C
  • Mandates the creation by the SEC of an Office of
    Credit Ratings (OCR) to provide oversight over
    nationally recognized statistical rating
    organizations (NRSRO) and enhanced regulation of
    such entities.
  • Grants authority to the SEC to temporarily
    suspend or permanently revoke the registration of
    an NRSRO with respect to a particular class or
    subclass of securities if after notice and
    hearing the NRSRO lacks the resources to produce
    credit ratings with integrity.

Title IX, Subtitle C
  • SEC prescribes rules with respect to credit
    rating procedures and methodologies.
  • OCR is required to conduct an examination of each
    NRSRO at least annually and shall produce a
    public inspection report.
  • SEC will require NRSROs to publicly disclose
    information on initial and revised credit ratings
    issued, including the credit rating methodology
    utilized and data relied on, to enable users to
    evaluate NRSROs.

Title IX, Subtitle C, NRSROs
  • NRSROs are required to establish, maintain,
    enforce and document an effective internal
    control structure governing the implementation of
    and adherence to policies, procedures, and
    methodologies for determining credit ratings.
  • Submit to the OCR an annual internal control
  • Adhere to rules established by the Commission to
    prevent sales and marketing considerations from
    influencing the ratings issued by a NRSRO.

Title IX, Subtitle C, NRSROs
  • Policies and procedures with regard to certain
    employment transitions to avoid conflicts of
    interest, the processing of complaints regarding
    NRSRO noncompliance, and notification to users of
    identified significant errors are required.
  • Compensation of the compliance officer may not be
    linked to the financial performance of the NRSRO.

Title IX, Subtitle C, NRSROs
  • The duty to report to appropriate authorities
    credible allegations of unlawful conduct by
    issuers of securities.
  • The consideration of credible information about
    an issuer from sources other than the issuer or
    underwriter which is potentially significant to a
    rating decision.
  • The Act establishes corporate governance,
    organizational, and management of conflict of
    interest guidelines. A minimum of 2 independent
    directors is required.

Title IX, Subtitle D
  • Improvements to the Asset-Backed Securitization
    Process (for CMO, CDO, CBO, CDO of ABS, CDO of
  • Regulations for assets if residential in nature
    are jointly prescribed by the SEC, the Secretary
    of Housing and Urban Development, and the Federal
    Housing Finance Agency.
  • Otherwise by the Federal Banking agencies and the

Title IX, Subtitle D
  • Securitizers are
  • Prohibited from hedging or transferring the
    credit risk it is required to retain with respect
    to the assets.
  • Required to retain not less than 5 of the credit
    risk for an asset that is not a qualified
    residential mortgage,
  • for commercial mortgages or other types of
    assets, regulations may provide for retention of
    less than 5 of the credit risk, provided that
    there is also disclosure.

Title IX, Subtitle E, Accountability and
Executive Compensation
  • National securities exchanges and associations
    will be required to prohibit the listing of any
    security of an issuer that is not in compliance
    with the requirements of the compensation
  • At least once every 3 years, a public corporation
    is required to submit to a shareholder vote the
    approval of executive compensation.
  • Once every six years there should be a
    shareholder vote whether the required approval of
    executive compensation should be more often that
    once every three years.

Title IX, Subtitle E, Accountability and
Executive Compensation
  • Shareholders may disapprove any Golden Parachute
    compensation to executives via a non-binding
  • Shareholders must be informed of the relationship
    between executive compensation actually paid and
    the financial performance of the issuer, taking
    into account any change in the value of the
    shares of stock and dividends of the issuer and
    any distributions.

Title IX, Subtitle E, Accountability and
Executive Compensation
  • Must disclose to shareholders
  • the median of the annual total compensation of
    all employees of the issuer, except the chief
    executive officer (or any equivalent position).
  • the annual total compensation of the chief
    executive officer, or any equivalent position.
  • the ratio of the amount of the medium of the
    annual total with the total CEO compensation.

Title IX, Subtitle E, Accountability and
Executive Compensation
  • The company shall also disclose to shareholders
    whether any employee or member of the board of
    directors is permitted to purchase financial
    instruments that are designed to hedge or offset
    any decrease in the market value of equity
    securities that are part of a compensation
  • Compensation Committee must be independent.

Title IX, Subtitle E, Accountability and
Executive Compensation
  • Federal regulators will proscribe regulations
    that a covered company shall disclose to the
    appropriate Federal regulator, all
    incentive-based compensation arrangements with
    sufficient information such that the regulator
    may determine whether the compensation package
    could lead to material financial loss to the
    company, and whether it provides the
    employee/officer with excessive compensation,
    fees, or benefits.

Title IX, Other Sections
  • Subtitle F - Improvements to the Management of
    the Securities and Exchange Commission.
  • Subtitle G - Strengthening Corporate Governance
    permit a shareholder to use a companys proxy
    solicitation materials for the purpose of
    nominating individuals to membership on the board
    of directors.
  • Subtitles H - Municipal Securities.
  • Subtitle I - Public Company Accounting Oversight
    Board, Portfolio Margining, and Other Matters.
  • Subtitle J - Securities and Exchange Commission
    Match Funding.

Title X - Bureau of Consumer Financial Protection
  • Bureau of Consumer Financial Protection, within
    the Federal Reserve. Consists of 5 units
  • Research
  • Community Affairs
  • Complaint Tracking and Collection
  • Office of Fair Lending and Equal Opportunity -
    ensuring equitable access to credit
  • Office of Financial Literacy - promoting
    financial literacy among consumers.

Title XI - Federal Reserve System Provisions
  • New position is created on the Board of Governors
    of the Fed, the "Vice Chairman for Supervision",
    to advise the Board.
  • GAO is now required to perform several different
    audits of the Fed.

Title XI - Federal Reserve System Provisions
  • The Fed is required to establish prudent
    standards for the institutions they supervise
    that include
  • Risk-Based Capital Requirements and Leverage
  • Liquidity requirements
  • Overall risk management requirements
  • Resolution plan and credit exposure report
    requirements and
  • Concentration limits.

Title XII Improving Access for Mainstream
Financial Institutions
  • Incentives that encourage low and medium-income
    people to participate in the financial systems
  • to enable low- and moderate-income individuals to
    establish one or more accounts in a federal
    insured bank
  • make micro loans, typically under 2,500
  • provide financial education and counseling

Title XIII Pay It Back Act
  • This title amends the Emergency Economic
    Stabilization Act of 2008 to limit the Troubled
    Asset Relief Program, by reducing the funds
    available by 225 billion (from 700 billion to
    475 billion) and further mandating that unused
    funds can not be used for any new programs.
  • Any proceeds from the sale of securities
    purchased to help stabilize the financial system
    shall be dedicated for the sole purpose of
    deficit reduction and prohibited from use as an
    offset for other spending increases or revenue

Title XIV - Mortgage Reform and Anti-Predatory
Lending Act
  • To be administered by the newly established
    Bureau of Financial Consumer Protection.
  • Subtitle A - Residential Mortgage Loan
    Organization Standards.
  • Subtitle B - Minimum Standards for Mortgages.
  • Subtitle C - High-Cost Mortgages.
  • Subtitle D - Office of Housing Counseling.
  • Subtitle E - Mortgage Servicing.
  • Subtitle F - Appraisal Activities.
  • Subtitle G - Mortgage Resolution and Modification.

Title XV - Miscellaneous Provisions
  • Restriction on U.S. Approval of Loans issued by
    International Monetary Fund.
  • Disclosures on Conflict Materials in or Near the
    Democratic Republic of the Congo.
  • Reporting on Mine Safety.
  • Reporting on Payments by Oil, Gas and Minerals in
    Acquisition of Licenses.
  • Study on Effectiveness of Inspectors General.
  • Study on Core Deposits and Brokered Deposits.

Title XVI - Section 1256 Contracts
  • A Section 1256 Contract refers to a section of
    the IRC 1256 that described tax treatment for
    any regulated futures contract, foreign currency
    contract or non-equity option. To calculate
    capital gains or losses, these trades have
    traditionally been marked to market on the last
    business day of the year.
  • A "section 1256 contract" shall not Include any
    securities futures contract or option on such a
    contract unless such contract or option is a
    dealer, securities futures contract swap form of
    a derivative, such as interest rate swaps,
    currency swaps, etc.

Dodd-Frank issues
  • U.S. Treasury Department already had proposed
    excluding foreign exchange swaps from new
    Dodd-Frank rules governing derivatives an
    exemption for which banks were pushing hard.
  • Fannie Mae and Freddie Mac, the mortgage giants
    that largely escaped reform in the Dodd-Frank
    financial overhaul.

Dodd-Frank issues
  • Congress hasn't provided the SEC any extra
    funding to take on these new regulatory duties.
  • Department of Treasury and Federal Reserve are
    exempt from margin requirement in swaps, but
    non-U.S. central banks are not. This is a source
    of international controversy.
  • Dodd-Frank is being implemented far more slowly
    than Congress intended.

Dodd-Frank issues
  • CFTC issued recently a final order stating which
    OTC derivatives rules under Dodd-Frank will take
    effect on their scheduled implementation date of
    July 16, 2011.
  • The order also gave temporary exemptions from
    many Dodd-Frank swaps requirements and delayed
    the implementation of some self-executing swaps
  • Basic framework of many swaps regulations is
    established under Title VII, many details are
    left up to a rulemaking process that is behind

Dodd-Frank issues
  • The law gives federal regulators unprecedented
    powers. Yet they are very slow in implementing
  • Key question in my opinion Can federal
    regulators be captured again by highly leveraged
    financial institutions?
  • And one more key question, again my opinion Who
    benefits from high degree of leverage of
    financial institutions?
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