Financial Reforms, Obama style.

This is the thirty ninth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Improving Accounting Standards: It is a fact that some of the most complicated instruments in the financial world like the derivatives, etc, were one of the major causes of the market failure. Being complicated in nature, they also required complicated accounting procedures to be complied with. And this complexity in accounting procedures helped the firms escape proper scrutiny and accountability.
The financial crisis eventually mad the authorities sit up and take note of the kind of instruments circulating in the market, and the way they were accounted for.
Arising from this realization, the following recommendations have been made to improve accounting standards.
1) Accounting standards setters have been asked to define what is fair value accounting. To lay down the ground rules and norms relaing to this sujbect, and to come up with standards that are consistent with their definition. One of the key requirements in this regard, is to establish a new financial measurement standard that would replace the existing model and to reduce the complexity of accounting standards. Another major objective is to set new accounting standards to promote global consistency in impairment approaches.
2) Loan loss provisioning and related issues is another task set for the standard setters to look into, and come out with a new and improved version to take care of the issues thrown up by the economic crisis. Standard setters have been asked to examine various approaches, apart from the existing ones, such as a fair value model, expected loss model, and dynamic provisioning.
3) Development of a single set of high quality global accounting standards is a cherished goal in the new global financial accounting regime. Where accounting treatment is similar for similar instruments throughout the world, supervision and regulation becomes easy, and also helps eliminate scope for misuse of the system.
To be concluded.

Financial Reforms, Obama style.

This is the thirty eighth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Introduction of better compensation packages: In general, compensation packages in the finance sector, especially the investment Banks, depended upon the profit pulled in by the whiz kids for their firm. This resulted in excessive risk taking. And when the risk materialized into reality, it led to the present crisis in the industry.
As such, compensation packages would henceforth be aligned to the long-term shareholder value and prudent risk-taking.
Money laundering, Terrorist financing etc: The United States is actively engaged in raising regulatory standards, within the U.S. as well as at the international level. The following areas would recieve special attention in the coming months and years- prudential supervision, tax information exchange, anti money-laundering, and terrorist financing.
Assessments and Peer reviews: The FSB has been engaged with international standard setters like the BCBS, International Association of Insurance Supervisors, the International Organization of Securities Commissions, and also the IMF to expand the use of assessments and peer reviews.
The existing level of compliance would be examined by building upon the existing applicable processes. The FSB is specially concerned with assessing compliance with international co-operation.
The International Co-operation Review Group of the FATF is charged with the responsibility of engaing with jurisdictions that don’t comply with the FATF guidelines, and to recommend counter measures in this regard.
Lack of international co-operation has been one of the major hurdles in implementing consistent laws to combat money laundering. Eventually, the U.S. and its international partners had to come up with tough measures and responses to bring the errant on board. Still a lot needs to be done.
To be concluded.

Financial Reforms, Obama sytle.

This is the thirty seventh in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Strengthening the FSB: The G-20 leaders had resolved to strengthen the FSB. As a first step, all the -20 members were included in the FSB. And the FSB was given the mandate for a new structure to enable it to promote global financial stability.
Prudential regulation: A global framework for promoting a stronger liquidity buffers at financial institutions, including cross-border ones is an avowed goal of the G-20. The FSB and BIS would jointly look for the development of macroprudential tools.
Expand scope of regulation: In the matter of regulation, higher standards would be applied to Tier I FHCs compared to other BHCs. The emphasis would be on the following aspects: stronger capital, liquidity and risk management standards. Systemically important financial institutions, markets, and instruments would be subject to commensurate level of regulation.
Foreign firms operating in the U.S. would be classified as Tier I FHCs where necessary, in line with similar treatment given to domestic companies. The U.S would treat foreign financial firms, in the matter of regulation, based on the regulatory regime in the home country of such firms.
The GLB Act lays down the ground rules for foreign firms to achieve the status of Tier I FHCs. In case of an American subsidiary of a foreign firm, it must be “well capitalized” and “well managed.” A foreign Bank that does not own or control an American one, but operates through a Branch must itself(Bank) be “well capitalized” and “well managed”. Where a foreign Bank operates through branches and subsidiary Banks, both the foreign parent and its U.S. subsidiary Bank must be “well capitalized” and “well managed”.
The Fed Reserve, in consultation with the Treasury, would determine the applicability of the above laws. Due regard would be given to the principle of “national treatment” and “equality of competitive opportunity”.
To be concluded.

Financial Reforms, Obama style.

This is the thirty sixth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Internationally active financial firms: Some of the financial firms that fell in the recent crisis had a strong international presence, and consequently spread the contagion around, resulting in widespread panic and downslide in the markets.
This development has led to the thinking among the authorities that cross border firms needed to be properly supervized and regulated to prevent them from spreading panic and distress. Supervisory colleges have become active for the thirty most significant global financial institutions. More such colleges are in the offing.
Crisis prevention mechanism: One of the major reasons for the spread of the financial contagion throughout the western world was the interconnectedness of the financial markets through the medium of the big players. Consequently, when the big players went down, they took the market with them.
The United States and its international partners would work out a plan of action to spruce up the mechanism for cross-border resolution of financial firms by the following methods:
1) Resolution authorities would be empowered suitably with tools of intervention to prevent situations from going out of hand, and to initiate resolution procedures on an ongoing basis.
2) Information sharing mechanism between regulating authorities in different countries would be streamlined to facilitate joint and co-ordinated action whenever required.
3) Crisis management systems would be enhanced and finetuned to deal with failures of large cross-border firms.
4) To improve the effectiveness of the existing rules in respect of clearing and settlement of cross-border financial contracts and large value payments.
5) Cross-border crisis management is the latest mantra for containing the scourge of financial congation from spreading across borders and causing misery and distress all around.
To be concluded.

Financial Reforms, Obama style.

This is the thrity fifth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Oversight of the global financial markets: Credit and other OTC derivatives were one of the major causes for the financial crisis. The complexity of the instruments left many of the even regular market players baffled. The fate of the lesser players, and the ordinary investors was even worse.
Lured by the promise of fast and high returns, countless investors burnt their butts in the conflagration that swept the markets subsequently.
Arising from this situation, the reforms package makes it a major issue to reform the markets and the unethical practices rampant therein, to bring about sanity and security to them. Towards this end, standardization of products and procedures would be vigorously implemented.
Another proposal is to set up a central clearing agency for derivatives, with special emphasis on clearing derivatives through central counterparties.
The United States has already created standardized contracts for the North American market, in line with the G-20 commitments. At the global level, several central counterparties have been established for clearing credit derivatives.
In so far as the OTC derivatives are concered, the reform proposals go beyond the G-20 commitments. International co-operation is seen as the key requirement to bring about stability to the markets, and ensure orderly conduct of the same.
The United States has resolved to work with all the concerned international players to raise the bar for the standard of OTC derivatives markets, to enhance integration of the American financial markets with the rest of the world; and to avoid any actions and reactions that could lead to market fragmentation with all its attendant consequences.
To be concluded.

Financial Reforms, Obama style.

This is the thirty fourth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.
The international scene in Regulation and Regulatory co-operation:
Even though the interconnectedness of the financial markets is a fact of life, and crisis has a way of negotiating its way very fast through the maze of the markets, to engulf the whole system across the world, regulatory co-operation has not kept pace with this reality.
In order to address this urgent need, the United States would make efforts to obtain international consensus on four core issues namely, regulatory capital standards, oversight of global financial markets, supervision of internationally active markets, and crisis prevention and management.
Strengthening international capital framework: The Basel II accord was expected to address the shortcomings of the earlier accord, but as it turned out, the present crisis has exposed the fact that it is not so, and the second accord is also in need of urgent repair, to counter the myriad problems and issues thrown up by this crisis.
1) One area of concern that needs to be reworked and resolved is the regulatory capital framework for trading book and securitization exposures.
2) Secondly, the definition of regulatory capital would be strengthened to harmonize it across borders and systems to bring about consistency in both concept and practice.
3) Thirdly, ias per the recommendations of the G-20 leaders, a simple, transparent, non-model measure of leverage would be developed.
4) Fourthly, mitigation of procyclicality would be tackled in such a way as to require Banks to maintain capital buffers in good times to enable them to utilize the same in times of stress. This would improve their comfort level during crisis times and help prevent a meltdown in the market.
To be concluded.

Financial Reforms, Obama style.

This is the thirty third in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Managing financial crises: Under the present regulatory regime in vogue, Bank failures could be dealt with either by infusing outside capital, or through the bankruptcy route. However, these methods are suitable for normal financial and economic conditions, and not in crisis situations.
With a view to deal with disorderly failures of Banks impacting adversely on the entire system, a new resolution regime on the lines of the FDIC would be created to tackle the failures of BHCs and Tier I FHCs. The idea is not replace the bankruptcy laws which will remain in place.
A new and special process would be put in place on the usage of the special resolution regime. The authority to decide on the application of this regime would vest with the Treasury who will consult the President, and obtain recommendation of two thirds of the members of the Fed Reserve Board, as also the written recommendation of two thirds of the members of the FDIC. In case of broker deals, FDIC approval is not required and two thirds of the SEC commissioners may approve the same. Where a Insurance company is involved, then the Office of National Insurance within Treasury would come into the picture.
Three reasons must be cited and justified for invoking the special regulatory regime processes, as follows:
1) That the subject firm is either in default, or in danger of defaulting.
2) That the failure of the firm would have severe consequences for the system or economy, as a whole.
3) That the problem cannot be resolved with the usual set of tools to avoid sever impact on the financial system or the economy. That the use of the special resolution regime would either avoid or mitigate the adverse effects.
It is also proposed that the Treasury have the authority to resolve failing firms under the special resolution regime. The Treasury would take all necessary steps as required to deal with the crisis. Another proposal is to amend the Fed Reserve’s Emergency Lending Authority to individuals, partnerships, and corporations in unusual and exigent circumstances. The Fed would be required to obtain prior written approval of the Secretary of Treasury for making such decisions in future.
To be concluded.

Financial Reforms, Obama style.

This is the thirty second in a series of articles on the financial reforms initiated by the Obama Administration in U.S.A.

Encourage Savings and Retirement Plans:  While the savings potential of the American households is enormous, the actual rate of savings is really low.   Consequently, they are left with little money when they retire from active life.   And when hit by a severe economic crisis, as being witnessed now, they are the worse for it, without any source of sustenance, except doles.   The effect is indeed devastating.

In order to address the problem, employers would be encouraged to offer specific plans for retirement for their employees.   Employers who do not offer such facility to their employees, could opt for the Automatic IRS with opt-out.   And lastly, to offer incentives for savings related to retirement.   The auto IRA option would be designed in such a way as to make it a simple mechanism, that would serve its purpose well, without putting too much pressure on the beneficiaries.

The above savings mechanism would provide employees a way to protect their post retirment investments, and provide for a peaceful retired life.   It would be a meaningful way of ensuring security for the employees at the end of their productive life.

Increasing retirement security is a primary objective in respect of employee benefits.   The retirement plans would be structured to be transparent, and give detailed information about the risks, returns, costs, etc, of different schemes to enable them to make informed choices.

Conflict of interests in the structuring, operation and regulation of retirement plans would be removed to prevent harm to employee interests.

Accountability and oversight would be part and parcel fo the scheme to ensure protection of employee interests.   Further, these plans would be made accessible to the maximum number of people with the objective of eventually reaching every one.

Simplicity of the scheme, and ease of operation would be ensured to increase participation.   Automatic features of such schemes that encompass a wide swathe of intended beneficiaries woud be put to good use, to channalize savings into specific and designated schemes.  

Cost is another major consideration that can make or mar a scheme.   It would be ensured that retirement plans are not only simple, but also inexpensive to participate to make them more attractive.

                                                                                              To be concluded.

Financial Reforms, Obama style.

This is the thirty first in a series of articles on the financial reforms, initiated by the Obama Administration in U.S.A.

Accountability:  The reforms package proposes making the financial firms and public companies accountable to their clients and investors.   In this regard, the following steps would be taken:

Protection to whistleblowers:  Financial rewards would be used as a weapon to garner information about wrong doing on part of firms.   Whistleblowers would be encouraged to provide material information leading to enforcement actions.   A seperate fund would be set up to compensate whistleblowers.

Expand sanctions regime:  In order to better enforce federal securities laws, the sanctions regime would be expanded.   The sanctions would be applicable across the industry in all its activities rather than specific to particular segments.   Collateral bars would be imposed as part of the sanctions regime.   The system of fixing primary responsibility would be harmonized.

Executive compensation package:  Non binding shareholder votes on executive compensation would be introduced to exert influence on firms to rationalize the packages.   Executive compensation packages, especially, retirement packages, have come in for severe public condemnation with top executives of failed Banks and firms laughing all the way to their homes with a fat severance package.

Co-ordination council for consumer and investor protection:  The proposal is to set up a co-ordination council with the heads of the SEC, the FTC, the Department of Justice, and the CFPA or their designees along with state and federal agencies to plug the loopholes in investor and consumer protection laws.

This council would be empowered to :

1. Establish a mechanism for State Attorney Generals, Consumer Advocates, and others to recommend on various issues.
2. Report to Congress and member agencies every year giving recommendations for imporvement in consumer and investor protection.
3. Carry out studies and consumer testing to identify gaps to improve upon consumer and investor protection.

The recently established Investor Advisory Committee of the SEC would be made permanent by statute.   This advisory committee is made of a diverse mix of investors who advise the SEC on regulatory priorities including on new products, trading strategies, fee structures, and the efficacy of disclosures.

                                                                                          To be concluded.

Financial Reforms, Obama style.

This is the Thirtieth in a series of articles on the financial reforms sought to be initiated by the Obama Administration in U.S.A.

Investor Protection:  Investor protection would be ensured by adhering to the principles of transparency, fairness, and accountability.

In order to enable the regulators and the CFPA to ensure adherence to these principles by the market players, the following steps are sought to be initiated.

1. The authority of the SEC would be expanded, especially in areas of critical importance, like disclosures.   The system of disclosures would be made more investor-friendly.
2. The SEC would be given new tools of trade to promote fair treatment of investors.
3. Broker-Dealers would be given a fiduciary duty towards their clients.   Regulations relating to investment advisers and broker-dealers would be rationalized to remove the confusion in this regard in the minds of the investors.
4. The responsibilities of these intermediaries would be properly codified, and made enforceable.   Even though the responsibilities of these two -the investment adiser and the broker dealer is different, the perception of the investors is otherwise.
5. One of the key areas of reform in the matter of investor protection would be to prevent financial intermediaries from misguiding the investors into products and services that do not suit either their appetite or their requirements, and are, in fact, more profitable to the intermediaries than the investors.
6. Another step in this direction of investor protection is the proposal to do away with the mandatory arbitration clauses in investor contracts at the initial stages.   That would leave the legal option open to the investors.

                                                                                                                                                                     To be concluded.

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