Financial Crisis News Center

FSA Chair Says Bank Fair Value and Loan Loss Accounting Can Add to Systemic Risk; Notes Tension Between Banking and Securities Regulators

This story appeared in Jim Hamilton's World of Securities Regulation.

Fair value mark-to-market accounting and accounting for loan losses as applied to banks can increase pro-cyclicality and pose a systemic risk, said UK Financial Services Authority Chair Adair Turner, and thus is linked to macro-prudential risk regulation. In remarks at a London conference hosted by the Institute of Chartered Accountants of England and Wales, he noted that no other sector of the economy is remotely comparable to banking in its capacity to be a driver of economic volatility. As a result, accounting standards relevant to banks need to reflect these differences.

On a broader level, the FSA Chair acknowledged the rising tension over fair value accounting between banking and securities regulators, which has spilled over into the accounting standard setters. The banking regulators are convinced that banks are different and that the IASB and FASB must consider this difference. The pure securities regulators, conversely, tend to be more sympathetic to the idea that accounts are for investors and must reflect fair value at all times.

UK FSA Dear CEO Letter to Investment Firms Faults Compliance with Principle on Protecting Client Assets

This story appeared in Jim Hamilton's World of Securities Regulation.

The UK Financial Services Authority has sent a Dear CEO letter and report to the chief executive officers of major insurance brokers and investment firms which hold money or assets on behalf of clients, drawing their attention to the FSA’s concerns over the handling of client money and assets. In the letter, the CEOs were asked to confirm that their firms are in compliance with their obligation to protect client money and assets.

The letter and report were sent to the CEOs of all insurance brokers and investment firms which are supervised by the FSA on a relationship managed basis and which are able to hold client money or assets. Other firms which have the ability to hold or control client money and assets will be provided with a link to the letter and report via a regulatory update sent to small firms.

Cross-Border Coordination of Hedge Fund Regulation Could be Tangible Fruit of SEC-FSA Dialogue

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The coordinated cross-border regulation of hedge funds could be one of the first tangible benefits of the recently announced joint commitment of the SEC and FSA to engage in cooperative global financial regulation. The two regulators agreed to identify a common, coherent set of data to collect from hedge fund advisers and managers to help them identify risks to their regulatory objectives and mandates. The FSA-SEC cooperation is designed to achieve coherent oversight of global actors and limit opportunities for regulatory arbitrage. SEC Chair Mary Schapiro said that, as the regulators of two of the world's major market centers, the SEC and the FSA have a strong interest in collaborating with respect to hedge funds and other market participants with cross-border operations.

UK Reaffirms Comply or Explain Model for Corporate Governance as Financial Crisis Roils

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Despite concerns that the comply or explain principle of corporate governance may not be robust enough in light of the financial crisis, the principle recently received a strong endorsement from the Walker Report on corporate governance, as well as from UK senior officials. There is no indication that the UK and other EU member corporate governance codes will abandon comply or explain in favor of a US-type Sarbanes-Oxley model, which they view as prescriptive and rules-based. Their main bow to the financial crisis is a call for increased shareholder vigilance and a closer inspection of company explanations.

SEC Acts to Curb Abusive Short Selling and Enhance Transparency

This story appeared in Jim Hamilton's World of Securities Regulation

The SEC made permanent a temporary rule reducing the potential for abusive naked short selling and acted to enhance the public availability of short sale information. Rule 204T was made permanent and new Rule 204 requires broker-dealers to promptly purchase or borrow securities to deliver on a short sale. The temporary rule, approved by the SEC in the fall of 2008, was set to expire on July 31.

The SEC is also working with several SROs to make short sale volume and transaction data available through the SRO websites. This effort will result in a substantial increase over the amount of information presently required by Temporary 10a-3T. That rule, which will expire on August 1, applies only to certain institutional money managers and does not require public disclosure.

UK FSA Sets Best Practices for Executive Compensation at Financial Firms

James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

There is growing concern that inappropriate executive compensation schemes at investment banking and trading firms may have contributed to the present market crisis. Specifically, remuneration structures of firms may have been inconsistent with sound risk management since they frequently gave incentives to pursue risky policies, undermining the impact of systems designed to control risk. With that in mind, the UK Financial Services Authority has set forth best practices for executive compensation. While the FSA has no wish to become involved in setting remuneration levels, since that is a matter for boards, the authority wants to ensure that firms follow remuneration policies which are aligned with sound risk management systems and controls, and also with the firm's stated risk appetite.

UK Accelerates New Rules on Contracts for Difference

James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Following extensive consultation and to help improve transparency in current market conditions, the UK Financial Services Authority has moved up the effective date of its new disclosure regime for contracts for difference to June 1, 2009. The new requirements would have applied originally from September of 2009. According to Alexander Justham, FSA director of markets, the new regime is a significant step in improving market transparency and the implementation date was brought forward to reflect that. The new rules will resolve some of the concerns raised about the risks of market players devising ways to avoid disclosure.

UK FSA: We Have Crossed the Regulatory Rubicon

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

As the legislative overhaul of the regulation of the financial markers looms, there is a growing consensus that the global financial system has crossed the Rubicon and there will be no return to the world of Glass-Steagall separation of securities and banking activities and the days of originate and hold before securitization. The recent UK FSA report on regulatory reform rejects a return to the historic separation of banking and securities market activity. While acknowledging the theoretical clarity of this model, the FSA said that it would be difficult for any one country to pursue a clear separation while other countries did not, and there is unlikely to be an agreement on an appropriate division, given the very different historic traditions in the US and Europe. Moreover, it is not clear that in its extreme and simple form, it is practical in today’s complex global economy. Thus, large complex financial institutions spanning a wide range of activities are likely to remain a feature of the world’s financial system.

UK Regulatory Reform Charts Way Forward on Mark-to-Market Accounting

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

UK Financial Services Authority Chair Adair Turner has set out a broad plan for overhauling financial regulation that envisions a systemic risk macro prudential regulator and increased reporting requirements for unregulated financial institutions such as hedge funds. The Turner plan also wrestles with the conundrum of fair value mark-to-market accounting. It is a conundrum because, in normal times, there are significant merits to this accounting approach when viewed from the perspective of an investor seeking accurate information on the value of a security. But in a financial crisis, the application of mark-to-market can feed procyclicality.

UK FSA Releases Blueprint for Massive Financial Regulatory Reform

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

UK Financial Services Authority Chair Adair Turner has set out a broad plan for overhauling financial regulation that envisions increased reporting requirements for unregulated financial institutions such as hedge funds as part of a pan-European systemic risk regulator. The plan envisions the retention of securitization under a reformed model, with no return to a Glass-Steagall like separation of banking and securities activities. The Turner plan also proposes the regulation of credit rating agencies to limit conflicts of interest and inappropriate application of rating techniques. The plan also calls for national and international action to ensure that executive compensation policies are designed to discourage excessive risk-taking.