Mary Schapiro, chairwoman of the Securities and Exchange Commission, made the keynote address at a conference on the Dodd-Frank Act at George Washington University Law School’s Center for Law, Economics and Finance this week.
The SEC recently released proposed new rules to establish capital, margin and segregation requirements for security-based swap dealers and major participants in the security-based swaps market, a regulation that was mandated by Title VII of Dodd-Frank. With the release of these proposed rules, the SEC has completed essentially its entire regulatory agenda under Dodd-Frank, which also included:
• Definitions of what constitutes a security-based swap and the key intermediaries in these markets.
• Proposed rules governing trading markets — or execution facilities — that bring together multiple participants to engage in these transactions.
• Proposed rules defining the process by which the SEC will determine which security-based swaps would be required to be cleared through clearing agencies that step in between the counterparties and effectively assume the risk of default.
• Proposed rules outlining the requirement to report trade data to data repositories and defining the duties of those repositories, including disclosure of trade data to the public.
• Proposed business conduct standards for security-based swap dealers.
All told, Schapiro stated, the purpose of Dodd-Frank was "to make the financial system safer and the derivatives market fairer, more efficient and more transparent," by imposing margin and capital requirements upon security-based swap dealers.
The newly proposed segregation rules are intended "to help ensure that customer property can be promptly returned to customers if a security-based swap dealer fails.” Many of the parameters of these rules have yet to be tested in the markets, so the SEC is seeking public comment on how they would work.
Schapiro was diplomatic to point out that the Commodity Futures Trading Commission (CFTC) has been unable to propose similar regulations for futures commission merchants, having cancelled the meeting that was supposed to consider these rules. However, Schapiro has had to deal with a headache of her own. Luis Aguilar, a fellow Democrat on the Commission who used to work for the mutual fund lobby Investment Company Institute, has kept the Commission from considering rules Schapiro believes are necessary to prevent a future bailout of money market mutual funds, given that failure of the Reserve Fund was one of the incidents that gave rise to the financial crisis of 2008.
In addition to Title VII of Dodd-Frank, Schapiro stressed that Title IX is also going to have a significant impact, and even a bigger one for most Americans, since this title contains the consumer protection provisions designed to respond to the excesses that occurred in the mortgage market when underwriting standards were discarded. The new regulations will give greater transparency to this market, so that consumers can determine the risk they are taking and securitizers of mortgages will be required to retain part of the risk so as to limit moral hazard. The SEC has adopted rules requiring securitizers to disclose the history of the assets that underlie the securities.
The SEC has also adopted regulations to reform credit ratings, after 84,000 securities had been rated AAA, but many of them defaulted. The Commission has adopted a dozen regulations to improve the integrity of ratings and reduce reliance on them and has established an Office of Credit Ratings. The Commission is considering further regulations regarding conflicts of interest and further measures to reduce reliance on ratings. In response to a question, Schapiro added that Dodd-Frank requires the SEC to consider alternatives to the model where the issuer pays for ratings, which creates a serious conflict of interest.
The SEC is also moving to implement the "say on pay" regulation, in order to give shareholders a channel to communicate to boards their views on executive compensation through nonbinding resolutions. Companies are required to disclose their responses to resolutions. Schapiro predicted that even a substantial number of no votes could be influential with boards.
Schapiro concluded that the market is full of zero-sum circumstances that allow some market participants to profit from opacity and superior information, so greater transparency is needed in order to allow investors to benefit from liquid securities markets.
Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.
Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.
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