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US Treasury Outlines Future Regulatory Priorities

by Glen Shapiro, LawAndTax-News, New York

27 November 2012

During her remarks to the Federal Reserve Bank of Chicagoï's 15th Annual International Banking Conference, Mary Miller, the United States Treasury's Undersecretary for Domestic Finance, was pleased to report steady progress on the many rules introduced by the Dodd-Frank Act, but then went on to set out a few of Treasury's key near-term regulatory priorities.

With regard to the existing progress on the Dodd-Frank Act regulations, she confirmed that "about 9 out of 10 rules scheduled to be in place have been either proposed or finalized," and it is anticipated that "seven more will take shape next year."

For example, on the Volcker Rule, which will restrict banking entities' ability to engage in short-term proprietary trading and limit their investments in hedge funds or private equity funds, the Treasury has been working closely over the past two years with the five independent regulatory agencies responsible for writing the regulation, and, she said, "the goal is to achieve a strong and consistent rule."

Apart from completing the Dodd-Frank Act mortgage-finance related rules in order to reinvigorate the US private lending market, she concentrated on three other short-term priorities - reforming the short-term funding markets to improve investor confidence and reduce the risk of market volatility; delivering a set of derivatives rules that can be efficiently implemented; and finalizing the Basel III capital rules for banks.

Firstly, she stressed that the structural vulnerabilities of the short-term funding markets, including money market funds (MMFs), need to be addressed so they do not put the health of broader US financial system at risk.

In particular, as MMFs provide a significant source of short-term funding for financial institutions, businesses and governments, and they are an important cash-management vehicle for both institutional and retail investors, their susceptibility to runs needs "to be reduced by adopting reforms that strengthen (their) loss absorption capacity and reduce the risk of destabilizing investor runs," she said.

Miller pointed to the Financial Stability Oversight Council's (FSOC) release for public comment of proposed recommendations for MMF reform, after the failure of the Securities and Exchange Commission to act, and looked forward "to hearing from a range of market participants over the next few months as the FSOC process moves ahead."

She also emphasized the task of improving the safety and soundness of repurchase markets, which underpin another crucial source of short-term funding, by a framework that "reduces reliance on intra-day credit, adopts appropriate haircuts on less-liquid collateral, and improves the operational systems technology in tri-party repo."

With regard to producing derivatives rules that work domestically and internationally, Miller said that "the key pillars of derivatives market reform (are that) trades should be cleared where appropriate and subject to a strong margin regime; the most standard derivatives should move to trade execution platforms; and the US should develop prudential regulations of large dealers and large market participants and provide enhanced disclosure to the public and regulators. In the near-term, we will work with the market regulators to help adopt rules that are driven by these core principles."

In addition, the Treasury "strongly supports efforts by US market regulators to align their rules on transactions that are subject to regulation under the Dodd-Frank Act. To provide certainty to global market participants, many of whom are hedging risks that are integral to their core operations, the US market regulators should strive to establish consistent standards that apply to cross-border transactions of similar types."

She also placed special importance on the banking regulators' attempts to finalize the regulations implementing the new Basel III standards for capital and liquidity. While the US banking agencies have formally announced they do not expect the proposed rules to become effective on January 1, 2013, and they have also offered some assurance that institutions will have time for transition after the rules take effect, she insisted that those agencies should work closely with their international counterparts towards Basel III implementation as soon as possible.

Furthermore, she encouraged the US's international counterparts to implement the Basel III leverage ratio, "to ensure that there is a simple backstop against excessive risk and to promote a level playing field."

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