SIFMA’s Kenneth E. Bentsen, Jr., executive vice president, public policy and advocacy, today testified before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises to discuss the impact of certain provisions of Dodd-Frank and their impact on credit availability.
“It is essential that U.S. regulatory agencies, in proposing regulations, consider and analyze both the individual aspects and combined impact of proposed rules that may place U.S. financial markets at an unwarranted competitive disadvantage compared to those countries that have not implemented a comparable approach,” said Bentsen. “We urge U.S. regulators to consider and address the interplay among reforms in the context of considering individual reforms.”
In testimony, Bentsen focused on implementation of the Volcker Rule, Credit Risk Retention, Title VII (derivatives) and Section 165(e) Single Counterparty Credit Limits.
Volcker Rule:
Bentsen outlined SIFMA’s key conceptual concerns with the Volcker Rule proposal’s approach including:
- An artificial distinction between permitted activities and proprietary trading;
- Negative presumptions and reliance on hard-coded criteria;
- A transaction-by-transaction approach; and
- An overly specific and prescriptive compliance regime.
Bentsen then discussed SIFMA’s suggestions for reorienting the proposal. To foster customer-oriented business, SIFMA believes the Agencies’ hard-coded criteria should be recast as guidance that helps banking entities to differentiate client-focused business from other business. The Agencies’ guidance should explicitly recognize that maintaining a customer focus not only requires a commitment to buy from and sell to customers, but also requires obtaining positions in anticipation of customer flow and trading in the interdealer market in order to validate liquidity, volatility, pricing, and other market trends.
Bentsen also noted that the proposal should make clear how the five Agencies will coordinate interpretation, examination and enforcement of the Volcker Rule regulations.
Credit Risk Retention:
With respect to the credit risk retention proposal, Bentsen specifically focused on the so-called Premium Capture Cash Reserve Account provision.
The premium capture requirement, if enacted, would sharply reduce incentives for residential and commercial lenders to utilize securitization as a source of funding for their activities. Both SIFMA’s buy- and sell-side members are strongly concerned that the proposed requirement for a premium capture cash reserve account presents a serious obstacle to structuring securitizations by taking away a legitimate source of funds to enable sponsors to recoup costs and generate a reasonable return.
Unless withdrawn, Bentsen noted, the premium capture provisions would likely discourage many securitization transactions, unnecessarily change some lenders’ origination practices, and increase the cost of some consumer loans.
The premium capture provisions would have their harshest impact on the residential and commercial mortgage securitization markets. The commercial market has recently begun to recover, but the residential mortgage securitization market, outside of the GSEs, has yet to show much life. The premium capture provisions could severely damage the recovery of commercial markets, and inhibit any recovery in residential securitization markets.
Title VII:
With respect to derivatives, Bentsen voiced SIFMA’s support for the goals of Dodd-Frank’s Title VII derivatives regulation, namely improving oversight of over-the-counter (OTC) derivatives markets and reducing systemic risk. SIFMA’s concern focuses on making sure those requirements are workable and that the benefits—as measured by how well rules accomplish their stated purposes—outweigh the costs.
Bentsen also urged regulators to take care to avoid unintended costs and market impacts by carefully sequencing and phasing in the implementation of rules by category, type of participant, asset class and products within asset classes.
Bentsen lastly remarked on the lack of coordination amongst both domestic and international regulators on OTC derivatives rulemaking. He noted that there is scant evidence that there will be harmonized rules for swaps and securities-based swaps even though there are businesses in which the line between the two products is an arbitrary distinction. Bentsen particularly noted the lack of coordination internationally between the CFTC and foreign regulators after the CFTC issued cross-border guidance that will likely have a significant impact on the international derivatives market.
Section 165(e) Single Counterparty Credit Limits:
Lastly, Bentsen addressed proposed rules implementing Section 165(e) of the Dodd-Frank act which addresses single counterparty credit limits. SIFMA supported the inclusion of a single counterparty credit limit because its members have been using internal models for many years to measure and control such exposures. SIFMA, however, does not support the Federal Reserve’s proposal in its current form because the proposal would needlessly reduce liquidity in the financial system and dampen economic activity.
The proposal requires large banking organizations to use new methodologies for measuring credit exposures that ignore their current approved internal methodologies. The new method is a crude measure that overstates exposures under any reasonable calculation methodology by a significant multiple. The effect of the new methodology for measuring credit exposure will be a reduction in market liquidity that may have a significant effect on markets more broadly.
Bentsen then addressed alternatives that have been put forward by the industry.
First, the Federal Reserve could amend its proposal to fix the problems as noted above: exempting high quality non-U.S. sovereigns, individuals, CCPs, and allowing netting, the use of the full value of collateral and double default protection. A second alternative would be to allow firms to use a “stressed” version of the internal models they currently use to measure such risk. Thirdly, the Federal Reserve could use a supervisory stress approach which would require a covered company to use a replacement cost, calculate in accordance with regulatory capital rules for derivative transactions under specific stress scenarios specified by the Federal Reserve.
