Minutes from November 11, 2011 meeting

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OTSEC 11/10/11

  • Purpose: no Hedge Funds inside banks
    • Traders are opaque about agency/prop trading
    • Should hold to same standard of collateral posting that etrade holds consumers to
    • Current Volcker approach is a complicated way to do it
    • Has to be expended to non-banks
      • Has been?
      • GM should be subject
      • Bank Holding companies fall under these rules.
      • Local dealers subject to rules?
      • SEC 2004 regs no longer apply to BHCs
      • 2004: big banks released from 12:1 leverage
      • Goldman etc..
  • Repo exemption fraught with abuse
  • Anything can be structured as an fx swap
  • In theory, rule exempts any trade that can be written up as foreign exchange contracts

 

 

  • Beginning summary
    • Supplementary information
      • Ability to issue exemptions to promote safety and soundness of banking industry or banking institution
        • Already in s 28 of 90s banking act
        • ‘General exemptive authority’
        • Can issue any exemption if good for investors
        • ‘by Rule’—have to go through comment
          • What’s substantive, what’s procedural, what can be ignored
    • 2. Overview of proposed rule
      • A. ‘Given these complexities, the Agencies request comment on the potential impacts the proposed approach may have on banking entities and the businesses in which they engage’
        • Philosophically faulty: should not just focus on impacts on banking entities but on public at large
        • Good zinger
        • Summary of parts
          • A -43
          • B- 94
          • C – 194
          • D – 275
          • Questions end 348
          • App A 443
          • App B 464
          • App C 479
      • B. Proprietary trading restrictions
        • 6.b Second category is riskless principal transactions
          • Acting as marketmaker in a transaction in which the covered banking entity, after receiving an order to purchase (or sell) a covered financial position from a customer, purchases (or sells) the covered financial position for its own account to offset a contemporaneous sale to (or purchase from) the customer
          • Quick give him the salt
        • Insurance
          • Included as exemption because already covered by heavy insurance regulations so can be reasonably excluded
          • Or do banks have loophole machine ready to go?
          • WTF is a banking entity that is a regulated insurance company?
        • Repo
          • certain repurchase and reverse repurchase arrangements or securities lending transactions, positions acquired or taken for bona fide liquidity management purposes, and certain positions of derivatives clearing organizations or clearing agencies.
      • C. Covered fund activities and investments
        • _.10
          • The definition of ownership interest also explicitly excludes from the definition “carried interest” whereby a banking entity may share in the profits of the covered fund solely as performance compensation for services provided to the covered fund by the banking entity (or an affiliate, subsidiary, or employee thereof).
          • If you can’t have an ownership interest, how can you have carried interest?
          • Defining Carried interest—excluded if banking entity shares in profits SOLELY as performance compensation
            • Carried int exemption allows hedge fund to be lightly taxed because already taxed
            • Goldman = investment adviser on a fund
            • Can only own 3 %
            • But doesn’t count…
            • Risk: that if you had carried interest position you’d want to bail out hedge fund
            • Also: what is bank doing for hedge fund that they’re gonna get carried interest?
            • Sounds like they want to be allowed to still run the hedge fund
            • Conflict of interest
            • Why would a hedge fund agree?
            • Bank needs another way to capitalize on flow knowledge.
            • Don’t want banks to bailout risky hedge funds
            • Flys in the face of the intent of the rule
            • Could serve as investment advisor to an arbitrary number of hedge funds—supposed to get out of the game
        • _.13 A
          • to acquire and retain an ownership interest in a covered fund as a risk-mitigating hedging activity
        • _.13 b
          • compensation arrangement with an employee of the banking entity that directly provides investment advisory or other services to that fun requires that the hedge represent a substantially similar offsetting exposure to the same covered fund and in the same amount of ownership interest in the covered fund arising out of the transaction that the acquisition or retention of an ownership interest in the covered fund is intended to hedge or otherwise mitigate.
        • _.13 c
          • Is this section just ‘foreign bank/fund = cool’
          • Or is it a big caiman island hedge fund rules
        • _.13 G 2 (statute)
          • Nothing shall be construed to limit ability of banking entity to sell or securitize loans
        • _.13 d
          • clarifies that a banking entity may acquire and retain an ownership interest in, or act as sponsor to, a covered fund that is an issuer of asset-backed securities, the assets or holdings of which are solely comprised of: (i)loans; (ii) contractual rights or assets directly arising from those loans supporting the assetbacked securities; and (iii) a limited amount of interest rate or foreign exchange derivatives that materially relate to such loans and that are used for hedging purposes with respect to the securitization structure
          • Synthetics actually excluded by this language? Or not?
    • D. Should be 6 years, NY state contract statue of limitations
    • Questions 1-4
      • This is great let’s go
      • there will be a # of incoming crises
    • Question 9
      • would issuers of asset-backed securities be captured by the proposed definition of “banking entity”? If so, are issuers of asset-backed securities within certain asset classes particularly impacted? Are particular types of securitization vehicles (trusts, LLCs, etc.) more likely than others to be included in the definition of banking entity? Should issuers of asset-backed securities be excluded from the proposed definition of “banking entity,” and if so, why? How would such an exclusion be consistent with the language and purpose of the statute?

 

incoming

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