BPInsights: September 20, 2019

BPInsights: September 20, 2019

Top of the Agenda

What Just Happened in Money Markets, and Why it Matters.

Two weeks ago, we wrote that there would be trouble in money markets in coming weeks. On September 16, that trouble arrived. That day was corporate tax day and, as always, there was a big move of cash (typically about $100 billion) into Treasury’s General Account at the Fed, with a commensurate drain in reserves from the banking system and also large (typically about $30 billion) outflows from money funds. Simultaneously, $54 billion in Treasury securities settled, further boosting the Treasury’s account at the Fed (draining reserves further) and increasing the amount of securities in private hands that needed to be financed. All this came against the backdrop of the Fed’s gradually declining balance sheet. In a new blog post from September 18, BPI’s chief economist Bill Nelson outlines the causes of the volatility and explains why it matters.  He also suggests that fixing the LCR would be good public policy and would allow the Fed to become smaller but wouldn’t fix the underlying problem. The financial system has become more prone to volatility because of regulatory capital charges on low- and no-risk assets such as Treasury securities and Treasury reverse repo.

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5 Stories Driving the Week

1. FDIC Approves Proposal to Eliminate Initial Margin Requirement for Inter-Affiliate Non-Cleared Swaps

On September 17, the FDIC approved a proposal to change the interagency margin requirements for non-cleared swaps, amending a 2016 rule that required a set amount of collateral for swaps between affiliates of the same firm. Most notably, the proposal would eliminate the initial margin requirements for inter-affiliate non-cleared swaps. The proposed change is consistent with BPI’s recommendations in a May 13 comment letter submitted jointly with other trades, which outlined the ways in which the elimination of the initial margin requirements would encourage sound risk management. The Federal Reserve and other regulators are expected to approve the proposal separately.  “This common-sense proposal will encourage prudent internal risk management practices, while still subjecting inter-affiliate derivatives transactions to important variation margin requirements that properly reduce default risks,” Greg Baer, BPI President and CEO, said in a statement.

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2. BPI Responds to CFPB’s Proposed Third-Party Debt Collection Rule

On September 18, BPI submitted a response to the CFPB’s proposal to modernize debt collection practices under the Fair Debt Collection Practices Act (FDCPA).  The letter supports the CFPB’s goal to modernize the debt collection regulatory framework but recommends that the CFPB should solely engage in its rulemaking under the FDCPA, rather than applying its general “unfair, deceptive, and abusive acts and practices” (UDAAP) authority to certain provisions in the proposal.  Relying on UDAAP for these provisions, as the letter outlines, would create legal uncertainty related to the application of the rule for first-party collection activities, which are distinct from the third-party collection activities covered by the FDCPA.   Further, the letter recommends clarifying the standards for “inconvenient” contacts and tailoring the proposed restrictions on debt sales and litigation, and also seeks further clarification regarding those standards related to personal representatives, the definition of “original creditor,” and certain aspects of the validation notice requirement.

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3. CFPB Director: For-Cause Removal Provision ‘Unconstitutional’

CFPB Director Kathleen Kraninger advised, in a letter to Congressional leadership, that the CFPB has determined that the “for-cause” removal provision in the Consumer Financial Protection Act of 2010 (CFPA) is unconstitutional, Politico reports.  In a September 17 letter to House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Mitch McConnell (R-KY), Kraninger stated that this provision in CFPA, which provides that a CFPB Director can be removed only for cause — which the CFPB had previously defended in a number of court challenges — is “unconstitutional,” bringing the agency’s official position in line with that taken by the Department of Justice in 2017. Kraninger noted that the CFPB had urged the Supreme Court to grant a pending petition for certiorari, which was filed in conjunction with an ongoing case, CFPB v. Seila Law, to resolve this question regarding the constitutionality of the for-cause removal provision.

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3. CFPB Director: For-Cause Removal Provision ‘Unconstitutional’

CFPB Director Kathleen Kraninger advised, in a letter to Congressional leadership, that the CFPB has determined that the “for-cause” removal provision in the Consumer Financial Protection Act of 2010 (CFPA) is unconstitutional, Politico reports.  In a September 17 letter to House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Mitch McConnell (R-KY), Kraninger stated that this provision in CFPA, which provides that a CFPB Director can be removed only for cause — which the CFPB had previously defended in a number of court challenges — is “unconstitutional,” bringing the agency’s official position in line with that taken by the Department of Justice in 2017. Kraninger noted that the CFPB had urged the Supreme Court to grant a pending petition for certiorari, which was filed in conjunction with an ongoing case, CFPB v. Seila Law, to resolve this question regarding the constitutionality of the for-cause removal provision.

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4. Senate, House Committees Hold Hearings on Real-Time Payments

The House Financial Services Committee and Senate Banking Committee will hold hearings on development of a real-time payments system. The Senate panel will hold a hearing on September 25 while the House will convene a hearing on September 26. On August 5, the Federal Reserve announced plans to develop its own new interbank 24x7x365 real-time gross settlement service, known as FedNow. The Clearing House, owned by 25 large U.S. banks, is currently operating a real-time payments system (RTP).  Concerns have also been raised about the Fed’s conflicting roles as regulator and private sector competitor.

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5. Senate Confirms McIntosh, Callanan to Treasury Department

On September 18, the Senate confirmed Brent McIntosh as Treasury undersecretary for international affairs and Brian Callanan as Treasury general counsel. The Senate confirmed McIntosh, the current Treasury general counsel, by a vote of 54-38. The Senate confirmed Callanan, currently deputy general counsel, by a vote of 55-39.

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In Case You Missed It

CFTC, SEC Approves Final Volcker Rule, Following OCC and FDIC Action
The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) approved final changes to the Volcker Rule, which restricts financial institutions’ ability to invest in private equity funds and engage in proprietary trading. The SEC approved the rule on September 18 while the CFTC approved the rule on September 16 by a 3-2 vote. Among other reforms to the regulation, the new rule further tailors compliance requirements based on the size of banks’ trading assets and liabilities and makes several revisions to the scope of the proprietary trading prohibition. Notably, the final rule also removes the “accounting prong” test, consistent with BPI’s recommendations in its 2018 comment letter on the proposed changes. The FDIC and OCC approved the final rule on August 20. The Federal Reserve has yet to act, but they also are expected to also approve the rule.

Hoyer Plans House Cannabis Banking Vote This Month
House Majority Leader Steny Hoyer (D-MD) intends to put cannabis banking legislation on the floor this month, according to reporting by Politico. A Hoyer spokesperson said the congressman was “discussing the matter with members but hasn’t scheduled the vote just yet,” and “other House Democratic aides said they expected the bill to be on the floor during the week of Sept. 23,” according to the report. The bipartisan legislation would shield banks from federal penalties if they serve cannabis-related businesses in states where the drug has been legalized. The Senate Banking Committee is also planning to vote on a cannabis banking bill this year.

OCC FinTech Charter Remains in Legal Limbo
The OCC’s fintech charter is still in legal limbo and will likely remain there for quite some time despite the agency’s recent court victory. The U.S. District Court of Columbia ruled in favor of the OCC earlier this month, finding that the Conference of State Bank Supervisors, which is challenging the charter, must wait until a charter is actually issued before pursuing litigation. Because the ruling related to timing rather than to the OCC’s authority to issue such a charter, which is the substance of the issue, the ruling leaves open the door for several more years of litigation. The issue will now have to be relitigated once a charter is issued. This second round of litigation will take several years and probably involve a trip to the Supreme Court. Meanwhile, it’s unclear whether a fintech would apply for the charter given the legal and regulatory uncertainty.

Upcoming Events

  • 9/24/18 — House Financial Services SEC Oversight Hearing
  • 9/24/19 — House Financial Services Subcommittee Hearing on Racial and Gender Wealth Gap
  • 9/25/19 — House Financial Subcommittee Hosts Hearing Titled “Promoting Financial Stability: Assessing Threats to the U.S. Financial System
  • 9/25/19 — House Financial Subcommittee Hearing on Protecting Seniors: A Review of the FHA’s Home Equity Conversion Mortgage (HECM) Program
  • 9/26/19 — House Financial Services Hearing on Real-Time Payments
  • 9/26/19 — House Financial Services Debt Collection Hearing: Examining Legislation to Protect Consumers and Small Business Owners from Abusive Debt Collection Practices
  • 11/19/2019 — The Clearing House + BPI 2019 Annual Conference: The Clearing House and BPI will host the 2019 Annual Conference from November 19 to 21. The event provides a forum for the industry’s leaders to examine the changing dynamics of the bank regulatory and payments landscapes with two and half days of high-level keynote speakers, in-depth expert panels, and networking.

 

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