The Committee on Capital Markets Regulation (CCMR), an independent and nonpartisan research organization dedicated to improving regulation and enhancing the competitiveness of U.S. public equity capital markets, today released data from the third quarter of 2012. According to the new study, U.S. capital markets reversed the second quarter downgrade and showed slightly improved competitiveness, though most measures of competitiveness still fall short of historical averages. Hal S. Scott, Director of the Committee said, “While foreign companies continue to prefer non-U.S. financial markets for raising capital outside their home markets, and regulatory reform is still needed, this quarter’s data offers a promising sign that competitiveness can be restored to U.S. markets.”

Of the global initial equity offerings conducted outside a company’s home market, 18.3% of these IPOs, by value, were listed on a U.S. exchange. While this measure is at its highest level over the past five years, the U.S. share of this volume remains well below its historical average of 28.7% (1996-2006). These percentages include all IPOs by foreign companies listed on either U.S. public markets or issued through private Rule 144A offerings. Excluding global IPOs that use the Rule 144A markets, the percentage of global IPOs listed on a U.S. exchange rises to 55.9%. However, the total value of these IPOs has decreased from $79.8 billion in 2010 and $39.3 billion in 2011 to only $9 billion thus far in 2012.

…continue reading: Some Improvement in U.S. Public Equity Capital Market Competitiveness

Debate continues around the proposed regulations to implement the Volcker Rule, most lately around its provisions related to permitted hedging activities. As the Committee on Capital Markets Regulation (CCMR) has commented in the past, the proposed regulations should be appropriately constructed to address activities that are specifically permitted under Dodd-Frank, including market-making, underwriting and hedging.

Following the recent JPMorgan (JPM) trading losses, some have called for tightening or even removing the provisions for portfolio hedging that are incorporated in the proposed regulations. Dodd-Frank permits hedging on aggregated positions but critics suggest this should not be interpreted to allow hedging on a portfolio basis. Despite the JPM losses, however, CCMR believes that portfolio hedging should in general be permitted.

Portfolio hedges are crucial for banks to reduce overall volatility and risk. Overly restricting hedging would actually increase bank risk, the very outcome the critics themselves seek to avoid. Suggestions that portfolio hedges need to be correlated to individual underlying positions are both unworkable and overlook the reality that banks seek to hedge their overall mix of assets, and potential movements across an entire portfolio, rather than single movements of individual assets. Furthermore, correlations evolve over time and hedging is a dynamic process.

…continue reading: Hedging Under the Volcker Rule

Thank you for permitting me to testify before you today on cost-benefit analysis conducted by the Securities Exchange Commission (SEC). I am speaking today on behalf of the Committee on Capital Markets Regulation (Committee), of which I am the Executive Director for Research. The Committee has, since its 2006 Interim Report, [1] strongly supported improved cost-benefit analysis by both the SEC and other agencies. Today, the need for improved cost-benefit analysis is particularly evident in the agencies’ respective rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). We are deeply concerned that the inadequate cost-benefit analysis in the vast majority of rulemakings under Dodd-Frank could expose these rules to judicial challenge, prevent important rules from taking effect, and contribute to uncertainty in our markets over their fate.

The broad scope of new regulation under Dodd-Frank, issued by agencies including the SEC, Commodity Futures Trading Commission (CFTC) and others, will result in fundamental changes across the financial industry. Sound cost-benefit analysis must be a part of this process, to ensure that in each case, the proposed rule is optimal among all reasonable alternatives. In light of the ruling last July by the U.S. Court of Appeals for the D.C. Circuit in Business Roundtable v. Securities and Exchange Commission, [2] and a current lawsuit seeking to strike down the CFTC’s recently promulgated position limits rule, [3] we believe many of the rules under Dodd-Frank could be subject to successful challenge in court. It would be an unfortunate outcome if, after the Dodd-Frank rulemaking process has run its course for several years, important rules are invalidated because of inadequate analysis. Even if such rules are not eventually invalidated, prolonged uncertainty around their fate threatens to hamper economic activity.

…continue reading: The Need for Improved Cost-Benefit Analysis of Dodd-Frank Rulemaking

As Senator Dodd and Senator Shelby continue to meet and search for a bipartisan financial regulatory reform bill, the Committee on Capital Markets Regulation (CCMR), an independent, non-partisan research organization and proponent of broad financial regulatory reform, has sent congressional leaders a letter outlining a blueprint for a compromise that would achieve practical and effective financial reform legislation.

In the 37-page letter the CCMR comprehensively evaluates all major elements in the financial reform proposals that have emerged from Senate committees, but focuses especially on four as areas ripe for compromise:

• “Never” is bad public policy. Federal regulators must have the ability to use tax dollars (and recoup them later) to pay for the orderly resolution of failing institutions in cases where they judge the alternative would be national and/or international financial catastrophe. However, the CCMR does not support the arbitrary $50 billion fund in the proposed Dodd bill, since no one can or should try to guess the cost of such bailouts. A better solution: give the Secretary of the Treasury the power to use public money, and then recoup funds after any needed bailout, starting first by recovering bailout funds from the creditors of the failed bank.

…continue reading: Capital Markets Committee Proposes Blueprint for Compromise on Financial Reform

The Committee on Capital Markets Regulation (CCMR), an independent, non-partisan research organization and a leading proponent of carefully considered financial regulatory reform, has proposed a comprehensive approach to reforming regulatory oversight of derivatives markets to reduce systemic risk in the financial system, through greater use of derivatives clearinghouses, to be overseen by the Federal Reserve.

In a 28-page letter to the Chairmen and Ranking Members of the Senate Banking Committee and House Financial Services Committee, the CCMR has provided a framework for legislating on many of the largest and thorniest financial reform issues on the Congressional agenda.

…continue reading: Committee On Capital Markets Regulation Proposes Fed-Regulated Clearinghouses To Reduce Systemic Risk

(Editor’s Note: This post is based on a letter sent by Hal S. Scott, R. Glenn Hubbard and John L. Thornton of the Committee on Capital Markets Regulation, an independent and nonpartisan research organization dedicated to improving the regulation and enhancing the competitiveness of the U.S. financial system, to the Chairmen and Members of the House Financial Services Committee and the Senate Banking, Housing and Urban Development Committee.)

The Committee on Capital Markets Regulation (“Committee”) has, since its establishment in 2005, provided empirical, independent research dedicated to improving the regulation of U.S. capital markets. In May 2009, the Committee published its report entitled, The Global Financial Crisis: A Plan for Regulatory Reform, setting out 57 recommendations for enhancing the soundness and effectiveness of the U.S. financial regulatory framework. [1] As part of its recommendations, the report sets out the Committee’s proposals for reforming the U.S. regulatory architecture to make it more robust and better designed to address the needs of investors and consumers of financial services. In this context, we felt that it would be useful to set out our position on the Administration’s proposal— presently embodied in H.R. 3126, the Consumer Financial Protection Agency Act of 2009 (Act)—that would establish the Consumer Financial Protection Agency (CFPA) as a dedicated agency for regulating and overseeing consumer protection issues in the provision of financial services. Where appropriate, we also make reference to the revised discussion draft of H.R. 3126 (revised discussion draft), proposing changes in the CFPA bill, circulated by Chairman Frank to the House Committee on Financial Services on September 22, 2009. [2]

From the outset, the Committee wishes to emphasize that establishing an independent regulatory agency for consumer and investor protection is one option the Committee believes deserves serious consideration; the other option, in our view, would be to incorporate this function as a division of a new consolidated regulatory agency. The Committee’s position on the Administration’s proposal, outlined below, is premised on the understanding that an independent agency would be created along the lines of H.R. 3126.

…continue reading: CFPA Legislation Goes Too Far on Some Issues, Not Far Enough on Others