Posts Tagged ‘Liquidity’

High-Frequency Trading: An Innovative Solution to Address Key Issues

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday September 17, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Jon Lukomnik of the IRRC Institute and is based on the summary of a report commissioned by the IRRC Institute and authored by Professors Khaldoun Khashanah, Ionut Florescu, and Steve Yang of Stevens Institute of Technology; the full report is available here.

As controversial as is HFT, the large volume of the discussion sometimes makes it hard to understand the content. What elements of HFT positively impact the trading markets? Which are problematic? What are the proposed mitigations? Therefore, the Investor Responsibility Research Center Institute (IRRC Institute) asked Khashanah, Florescu, and Yang (KF&Y) to look at HFT from various perspectives. The result includes:

  • The effect of HFT on volume, price efficiency and liquidity.
  • The problems and risks seen by various stakeholders from their vantage points.

…continue reading: High-Frequency Trading: An Innovative Solution to Address Key Issues

The Hidden Costs and Underpinnings of Debt Market Liquidity

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 26, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from Amar Bhidé, Thomas Schmidheiny Professor at The Fletcher School.

Even as rabble rousers rail against financiers, the powers that be prize the breadth and liquidity of financial markets. Flash traders are investigated for unsettling stock markets and violators of securities laws receive jail sentences on par with violent criminals. The Federal Reserve has spent trillions with the avowed aim of pumping up the prices of traded securities, while expressing little more than the pious hope that this largesse might spill over into old-fashioned, illiquid loans.

…continue reading: The Hidden Costs and Underpinnings of Debt Market Liquidity

SEC Adopts Money Market Fund Reforms

Editor’s Note: Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Davis Polk client memorandum.

On July 23, 2014, the Securities and Exchange Commission (the “SEC”) adopted significant amendments (the “amendments”) to rules under the Investment Company Act of 1940 (the “Investment Company Act”) and related requirements that govern money market funds (“MMFs”). The SEC’s adoption of the amendments is the latest action taken by U.S. regulators as part of the ongoing debate about systemic risks posed by MMFs and the extent to which previous reform efforts have addressed these concerns. Meanwhile, the U.S. Treasury Department (“Treasury”) and the Internal Revenue Service (the “IRS”) released guidance on the same day setting forth simplified rules to address tax compliance issues that the SEC’s MMF reforms would otherwise impose on MMFs and their investors.

…continue reading: SEC Adopts Money Market Fund Reforms

US Regulatory Outlook: The Beginning of the End

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday August 4, 2014 at 9:23 am
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Editor’s Note: The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication. The complete publication, including appendix and footnotes, is available here.

Regulatory delay is now the established norm, which continues to leave banks unsure about how to prepare for pending rulemakings and execute on strategic initiatives. With the “Too Big To Fail” (TBTF) debate about to hit the headlines again when the Government Accountability Office releases its long-awaited TBTF report, the rhetoric calling for the completion of these outstanding rules will once more sharpen.

This rhetoric should not be confused with reality, however. At about this time last summer, Treasury Secretary Lew stated that TBTF would be addressed by the end of 2013—a goal that resulted in heightened stress testing expectations and a vague final Volcker Rule in December, but little more. Since then, the slow progress has continued, with only two key rulemakings completed so far this year: the finalization of Enhanced Prudential Standards for large bank holding companies (BHCs) and a heightened supplementary leverage ratio for the eight largest BHCs (i.e., US G-SIBs).

…continue reading: US Regulatory Outlook: The Beginning of the End

Money Market Fund Reform

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Friday July 25, 2014 at 9:00 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today’s [July 23, 2014] reforms will fundamentally change the way that most money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system in a crisis. Together, this strong reform package will make our financial system more resilient and enhance the transparency and fairness of these products for America’s investors.

…continue reading: Money Market Fund Reform

An Economist’s View of Market Evidence in Valuation and Bankruptcy Litigation

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday June 28, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Faten Sabry, Senior Vice President at NERA Economic Consulting, and is based on a NERA publication by Ms. Sabry and William P. Hrycay.

Courts often face many challenges when assessing the solvency of a company whether public or privately held. Examples of difficult valuation questions include: would a company with a market capitalization of several hundred million dollars possibly be insolvent? Or, would publicly-traded debt at or near par be conclusive evidence that the issuer is solvent at the time? Or, would a company’s inability to raise funds or maintain its investment grade rating at a given time be sufficient to rule on solvency?

It is common in valuation and solvency disputes to have qualified experts with very different opinions on the fair market value of a company, often using the same standard approaches of discounted cash flows and comparables. How would the courts or the arbitrators decide and what is the role of contemporaneous market evidence in such disputes? In this article, we discuss the role of market evidence and possible misinterpretations of such evidence and highlight recent court decisions in the United States.

…continue reading: An Economist’s View of Market Evidence in Valuation and Bankruptcy Litigation

Clearinghouses as Liquidity Partitioning

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday June 20, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Richard Squire, Professor of Law at Fordham University School of Law.

The Dodd-Frank Act established that certain swap contracts which previously were traded bilaterally (directly between buyers and sellers) must be traded through clearinghouses instead. Critics of this clearing mandate have mounted two main objections: a clearinghouse shifts risk instead of reducing it; and a clearinghouse could fail, requiring a bailout. In my article Clearinghouses as Liquidity Partitioning, recently published in the Cornell Law Review, I counter both objections by showing that clearinghouses engage in a socially valuable function that I term liquidity partitioning. Liquidity partitioning means that when one of its member firms becomes bankrupt, a clearinghouse keeps a portion of the firm’s most liquid assets, and a matching portion of its short‑term debt, out of the bankruptcy estate. The clearinghouse then applies the first toward immediate repayment of the second. Economic value is created because the surviving clearinghouse members are paid much more quickly than they would be in a bankruptcy proceeding. Meanwhile, the bankrupt member’s outside creditors are not paid any less quickly: they still are paid at the end of the bankruptcy proceeding, which the clearinghouse does nothing to prolong. These rapid cash payouts for clearinghouse members reduce illiquidity and uncertainty in the financial sector, the main causes of contagion in a crisis. And because the clearinghouse holds only liquid assets, it avoids the maturity mismatch between short‑term liabilities and long‑term assets that characterizes the balance sheets of many financial institutions. A clearinghouse therefore is much less likely than its members to fail during a crisis.

A clearinghouse achieves liquidity partitioning by engaging in netting. Thus, when a member fails, the clearinghouse uses short‑term debts owed to the member to immediately repay short‑term debts owed by the member. In this way, cash is intercepted on its way toward the bankruptcy estate and redirected toward other financial firms, who may be suffering their own liquidity shortages. The clearinghouse thereby shifts cash from lower-value to higher-value uses, decreasing liquidity pressure on the financial sector and thus the need during a crisis for a taxpayer-funded bailout.

…continue reading: Clearinghouses as Liquidity Partitioning

Dodd-Frank Enhanced Prudential Standards for Foreign Banks with Limited US Footprints

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday March 26, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Luigi L. De Ghenghi and Andrew S. Fei, attorneys in the Financial Institutions Group at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum; the full publication, including diagrams, tables, and flowcharts, is available here.

The Federal Reserve has issued a final rule adopting a tiered approach for applying Dodd-Frank enhanced prudential standards to foreign banking organizations (“FBOs”). Under the tiered approach the most burdensome requirements (e.g., the requirement to establish a top-tier U.S. intermediate holding company) will only apply to FBOs with large U.S. operations, whereas fewer requirements will apply to FBOs with limited U.S. footprints.

We have summarized below the Dodd-Frank enhanced prudential standards that will apply to the following FBOs with limited U.S. footprints:

…continue reading: Dodd-Frank Enhanced Prudential Standards for Foreign Banks with Limited US Footprints

Final Federal Reserve Rules for Foreign Banking Organizations

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday March 23, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Joseph T. Lynyak, III and Rodney R. Peck, partners in the Financial Services Regulation practice at Pillsbury Winthrop Shaw Pittman LLP and is based on a Pillsbury publication by Messrs. Lynyak and Peck.

This post describes the final regulations issued by the Federal Reserve Board (the “FRB”) on February 18, 2014, that radically modify the former requirements applicable to foreign banking organizations (“FBOs”) pursuant to the FRB’s Regulation K. The final rules (the “Final Rules”) impose various requirements on large FBOs that previously have been applied to large U.S. domestic bank holding companies and banks under the Dodd-Frank Act. In addition, however, the Final Rules also alter many of the former approaches to the regulation of FBOs in general, including the necessity for many FBOs to form “U.S. intermediate holding companies” for their U.S. operations.

Regardless of the category an FBO falls into, the Final Rules present significant additional compliance burdens.

…continue reading: Final Federal Reserve Rules for Foreign Banking Organizations

Enhanced Prudential Standards

Editor’s Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Andrew R. Gladin, Rebecca J. Simmons, Mark J. Welshimer, and Samuel R. Woodall III. The complete publication, including Annexes, is available here.

On February 18, 2014, the Board of Governors of the Federal Reserve System (the “FRB”) approved a final rule (the “Final Rule”) implementing certain of the “enhanced prudential standards” mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”). The Final Rule applies the enhanced prudential standards to (i) U.S. bank holding companies (“U.S. BHCs”) with $50 billion (and in some cases, $10 billion) or more in total consolidated assets and (ii) foreign banking organizations (“FBOs”) with (x) a U.S. banking presence, through branches, agencies or depository institution subsidiaries, and (y) depending on the standard, certain designated amounts of assets worldwide, in the United States or in U.S. non-branch assets. The Final Rule’s provisions are the most significant, detailed and prescriptive for the largest U.S. BHCs and the FBOs with the largest U.S. presence—those with $50 billion or more in total consolidated assets and, in the case of FBOs, particularly (and with increasing stringency) for FBOs with combined U.S. assets of $50 billion or more or U.S. non-branch assets of $50 billion or more.

…continue reading: Enhanced Prudential Standards

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