What are the Treasury
In June the US Department of the Treasury released the first
in a series of reports to President Donald Trump reviewing the financial system
Entitled A Financial
System That Creates Economic Opportunities, the reports are a direct
response to the President’s February 3 executive order 13772 which asks for a
review of financial regulation and its effectiveness by identifying ‘any laws,
treaties, regulations, guidance, reporting and record keeping requirements, and
other Government policies that inhibit Federal regulation of the US financial
system in a manner consistent with the Core Principles’.
What are these core
In the executive order, President Trump outlined his
administration’s policy to regulate the financial markets in a manner
consistent to these core principles:
‘(a) empower Americans to make independent
financial decisions and informed choices in the marketplace, save for
retirement, and build individual wealth;
(b) prevent taxpayer-funded bailouts;
(c) foster economic growth and vibrant
financial markets through more rigorous regulatory impact analysis that
addresses systemic risk and market failures, such as moral hazard and
(d) enable American companies to be
competitive with foreign firms in domestic and foreign markets;
(e) advance American interests in
international financial regulatory negotiations and meetings;
(f) make regulation efficient, effective,
and appropriately tailored; and
(g) restore public accountability within
Federal financial regulatory agencies and rationalize the Federal financial
In the same order, the President called
on Secretary of the Treasury, Steven Mnuchin, to report to him within 120 days
on how the existing rules can be improved, repealed or replaced.
What has been released so far?
Mnuchin was 10 days late with his first report, and rather than release an all-inclusive report covering all aspects of the financial system, he broke it down into four sections. The first of these reports was issued on June 12 on banking rules, the second on capital markets on October 2, and the final one on asset management and insurance, and retail and institutional investors, on October 27.
Speaking at the Securities Industry and Financial Markets Association (Sifma) and The Clearing House’s Prudential Regulation Conference in Washington the day after the banking report was released, counsellor to the Treasury Secretary Craig Phillips suggested that the report is not a plan to help the big banks, or other market participants of scale, but a guideline to assess the regulatory impact across the entire system.
"Our goal is to provide a regulatory path that helps customers without putting taxpayers at risk or lowering the standards that are appropriate," he said. "We really tried to strike a balance between the two goals, while keeping consumers and businesses first in line as we thought about our recommendations."
What does the series of reports suggest/recommend?
In the combined 557 pages that have been released to date, the three reports make extensive recommendations that exhaustively look at the issues in each sector. The capital markets report alone has more than 90 distinct recommendations, and the asset management more than 60.
- In the banking report, the key areas identified as key in regulatory reform are summarised as follows; addressing the US regulatory structure; refining capital, liquidity, and leverage standards; providing credit to fund consumers and businesses to drive economic growth, improving market liquidity, allowing community banks and credit unions to thrive, advancing American interests and global competitiveness, improving the regulatory engagement model, enhancing the use of regulatory cost-benefit analysis and encouraging foreign investment in the US banking system. This report sets the tone for the entire series, recommending a loosening of regulatory oversight over lenders and a relaxation of the Volcker Rule.
- In the capital markets report Treasury recommendations include promoting access to capital, promoting secondary markets in equity and debt, tailoring regulations in securitisation to encourage lending and risk transfer, promoting a more efficient derivatives market, ensuring risk management for central clearing houses, modernising capital markets regulatory structure, and advancing US interests by promoting a level playing field on the international markets. The general message of this particular report is decrease regulation of the debt and equity markets.
- The recommendations of the third report on asset management focus on ensuring the evaluation of systemic risk, solvency, and stress testing; nurturing efficient regulatory frameworks to decrease burdens; rationalising international engagement to remain competitive, and improving consumer access to a variety of relevant products and services. The Treasury has rejected any additional oversight of asset managers, arguing they are not to be regulated like lenders.
How have they been received?
The reports have largely been well received by the industry. Sifma President and chief executive Kenneth Bentsen commended Secretary Mnuchin and the Treasury Department staff for its thorough review of the financial regulatory system, highlighting that the US has implemented hundreds of regulations since the financial crisis—on top of what was an already saturated regulatory framework.
“Clear market rules and prudent capital standards can provide investor confidence and financial stability necessary for robust markets, capital formation and economic growth,” he said. “But redundant and conflicting rules, or measures that unnecessarily outweigh stability over investment can result in inefficient regulation and stifle our growth potential.”
“Given the multitude of regulatory initiatives over the last decade alone, notwithstanding the decades prior, the time for a comprehensive review is due,” he added.
Scott O’Malia, the chief executive of the International Swaps and Derivatives Association, agreed. “We applaud the Treasury for recognising the benefits of derivatives on the US financial markets by helping firms reduce and better manage their risk,” he said.
The Securities and Exchange Commission (SEC) has featured heavily in the reports. In a conversation at Sifma’s annual conference in October, Chairman Jay Clayton too expressed his support.
“They are fantastic pieces of work in terms of setting where the debate is and how we should move forward,” he said. “I am not going to say that we like every aspect, we are an independent agency, but in terms of framing the debate, they are fantastic.”
“I actually kind of wish they were out before I had to go through confirmation, I could have read those instead of the 100 other things I had to read. I think it is a very constructive way to go about looking at where regulation should go in this space,” he added.
"I actually wish they were out before I had to go through confirmation - I
could have read those instead of the 100 other things I had to read"
(SEC chairman Jay Clayton)
Republican Senator for Idaho, and chairman of the Senate Banking, Housing, and Urban Affairs Committee, Mike Crapo, gave his full backing to the reports at the prudential standards conference. He cited that the cost of regulatory compliance on the US economy is estimated by some organisations to be close to $1.8 trillion a year, a drag on the economy and an issue in need of reform on par with reforming the tax code and dealing with US national debt.
"That is why I am so excited to see that the administration is committed to this," he said. "We still have to maintain safety in silence, we still have to protect our environment and we still need to have adequate assurances that the safety nets that need to be in place, are in place."
"But we can do it a lot better than we are doing it now," he added.
What needs to be done now?
While the reports make a number of recommendations, they are by definition not binding. The suggestions contained within the reports can be made by altering existing regulations, rather than introducing new ones. The changes can largely be made by two main regulators, the SEC and the Commodity Futures Trading Commission (CFTC), rather than legislation.
According to David Tittsworth, counsel at Ropes & Gray, the central question is whether the SEC and CFTC will consider taking action on the Treasury recommendations. “Both agencies have other pending regulatory issues to consider and the sheer volume of additional Treasury recommendations could arguably overload the potential regulatory agendas of both agencies,” he said. “Having said that, it appears that a number of recommendations would be consistent with themes that both SEC Chairman Clayton and CFTC Chairman Giancarlo have enunciated.”
“It is likely that the Treasury reports will certainly generate discussion about a wide variety of issues, but it certainly will not result in the immediate adoption of dozens of regulations,” he added.
Tittsworth continued to say that some of the recommendations, particularly in the regulatory realm, will likely gain some traction, but it would be remembered that the regulatory process rarely moves quickly.
“And other issues and external events can overshadow the best laid plans of an agency,” he said.
"The sheer volume of additional Treasury recommendations could arguably overload the potential regulatory agendas of both agencies"
“Nothing is easy to get through congress at the best of times, and these are far from the best of times,” said Davis Polk partner Gabriel Rosenberg. "There is a sense that this is a wish list, and not everything on a wish list comes at the same time,” he said, “various pieces of this have very different possibilities of passage, even when they are the same type of change".
Has anyone done anything about it yet?
Although it’s still early days, and not much happens very quickly in the world of financial regulation, one recent example saw the CFTC issue an order that was recommended by the Treasury. The order, issued on October 26, keeps ‘the swap dealer de minimis threshold at $8 billion until December 2019’ as suggested, rather than having it decreasing to $3 billion at the end of next year.
While this is of course a drop in the ocean, it is evidence to an extent that regulators, or at least the CFTC, have taken note of the recommendations and are making moves to implement them, where appropriate.
What happens next?
The exact level of uptake of the recommendations over the next months and years will be able to be seen. The current administration has not had too much luck implementing its agenda as of yet, and whether the Treasury report will be able to bear any fruit is uncertain.
At some stage in the coming months, the fourth report, focussing on non-bank financial institutions, financial technology, and financial innovation will be released and there will be a full picture of the regulatory landscape that Trump and Mnuchin are working towards.
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