RMA offers amendments to Dodd-Frank rules
26 May 2017 Washington DC
Image: Shutterstock
The Risk Management Association’s (RMA) securities lending committee has written to the US Treasury as part of its President Donald Trump-mandated review of regulatory burdens on the financial system.
Trump’s February executive order on the core principles for regulating the US financial system charged the Treasury with reviewing regulations with a view to relieving unnecessary burdens.
In its letter, the RMA’s securities lending committee set out four recommendations for revisions to the Dodd-Frank Act, which “grossly overstates the risk of agency securities” and is “putting US agent banks at a severe competitive disadvantage”.
Primarily, the RMA suggested that the Federal Reserve should drop plans to adopt single-counterparty credit limits.
Single-counterparty credit limits are based on “a flawed methodology from the federal banking agencies’ capital adequacy rules that grossly overstates the risk of agency securities lending transactions, discourages sound risk management practices, and if adopted, likely would have an immediate and drastic impact on market liquidity”.
Federal banking agencies should also review the collateral haircut approach in order to ensure that agent lenders are able to continue operating effectively in the lending space.
The risk-weight for exposures to securities firms that come under capital rules could also be brought in line with similar rules in other jurisdictions, according to the RMA’s securities lending committee.
“Failure to do so places US agent banks at a severe competitive disadvantage relative to non-US banks and severely limits their ability to service the US markets”.
Finally, federal agencies could avoid placing “enormous administrative and operational burdens on agent banks without any tangible benefits to financial stability” by narrowing the scope of their proposed rules regarding contractual stay requirements for qualified financial contracts.
The narrower scope would exclude categories of agreements under US law that do not create the types of cross-border resolvability issues that the rules are intended to address.
The RMA’s securities lending committee stated: “The federal banking agencies have long acknowledged that financial regulation should not only be efficient, effective and appropriately tailored, but also should benefit American investors and ultimately help foster economic growth and vibrant financial markets.”
Trump’s February executive order on the core principles for regulating the US financial system charged the Treasury with reviewing regulations with a view to relieving unnecessary burdens.
In its letter, the RMA’s securities lending committee set out four recommendations for revisions to the Dodd-Frank Act, which “grossly overstates the risk of agency securities” and is “putting US agent banks at a severe competitive disadvantage”.
Primarily, the RMA suggested that the Federal Reserve should drop plans to adopt single-counterparty credit limits.
Single-counterparty credit limits are based on “a flawed methodology from the federal banking agencies’ capital adequacy rules that grossly overstates the risk of agency securities lending transactions, discourages sound risk management practices, and if adopted, likely would have an immediate and drastic impact on market liquidity”.
Federal banking agencies should also review the collateral haircut approach in order to ensure that agent lenders are able to continue operating effectively in the lending space.
The risk-weight for exposures to securities firms that come under capital rules could also be brought in line with similar rules in other jurisdictions, according to the RMA’s securities lending committee.
“Failure to do so places US agent banks at a severe competitive disadvantage relative to non-US banks and severely limits their ability to service the US markets”.
Finally, federal agencies could avoid placing “enormous administrative and operational burdens on agent banks without any tangible benefits to financial stability” by narrowing the scope of their proposed rules regarding contractual stay requirements for qualified financial contracts.
The narrower scope would exclude categories of agreements under US law that do not create the types of cross-border resolvability issues that the rules are intended to address.
The RMA’s securities lending committee stated: “The federal banking agencies have long acknowledged that financial regulation should not only be efficient, effective and appropriately tailored, but also should benefit American investors and ultimately help foster economic growth and vibrant financial markets.”
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