Dec 192014

Policy makers remain busy and market volatility remains high ahead of the holidays.  Oil’s continued move lower, Russia and the FOMC statement were the key events driving this past week’s volatility.  The Fed also announced a two-year delay in the implementation of some parts of the Volker Rule this week.  The delay did not affect the ban on proprietary trading which banks must stop by July 2015.

The University will be on holiday until January 5, 2015.  The News & Policy Round-Up will return next year.  The CFP wishes everyone a happy and safe holiday season.


Fed Grants Volker Rule Reprieve

Fed Press Release

FOMC “Patient” On Interest Rates

FOMC Press Release

Market Microstructure

NYSE Offers Many Concessions to Investors

Danger Seen In Shedding Light On Dark Pools

Dec 182014
Bill Longbrake

Bill Longbrake

In this month’s letter, Bill Longbrake provides a brief overview of key global economic themes as we end 2014 and enter 2015. There is also an in-depth assessment of the impacts and potential consequences of the recent 45 percent crash in oil prices. He provides a year-end assessment of observations he made a year ago about how the U.S. and global economies might fare in 2014 – noting what he got right and the many things he didn’t. He then speculates about what might happen in 2015 and outlines key risks to the 2015 outlook.  Read the full letter.

Dec 122014

Regulators and legislators both focused on issues related to systemic risk over this past week.  The House passed a $1.1Trn spending bill just in time to avert a government shutdown.  The bill was in doubt due a provision to roll back a part of Dodd-Frank that forces banks to spin off some derivatives trading activities, which legislators consider the riskiest activities and cause of the 2008 financial crisis.  Supporters of the repeal of this provision, along with others as the WSJ article notes, expressed concern that forcing banks to spin these swaps off could ultimately create more instability by pushing them to an unregulated sector of the financial system, or shadow-banking sector.   This represents the largest change to Dodd-Frank thus far, and we could see additional changes in the coming year as discussed in previous blog posts.

SEC Chief Calls for Stress Testing Mutual Funds

Mutual Fund Companies May Face New Rules

Text of SEC Chair White’s speech 

Swap Talk: Why Are People Fighting Over Dodd-Frank and Derivatives?

Shadow Banks Feast On Emerging Market Boom

Fed’s debate shifts from lift-off to long march to normal

Big Banks Find They Are In Yet Another Hole

Fed’s debate shifts from lift-off to long march to normal

New Tax Rules Have Negative Effects on Reincorporating Abroad via Mergers

Dec 072014

The commodity markets remain in regulators crosshairs as the Fed is expected to issue new rules that could restrict banks from trading certain types of commodities and increase capital requirements.  Fund managers and their management boards continue to highlight the issues surrounding fixed income market structure and illiquidity, a topic covered at the CFP’s recent conference with the MFDF.  The Office of Financial Research (OFR) released its annual report, which describes the state of the United States financial system and threats to U.S. financial stability, cited rising interest rates as one threat to the stability of financial markets for the year ahead.


Fund boards, management go on high alert around bond liquidity

Federal Reserve Proposes New Regulations for GE Capital

Fed Plans to Tighten Commodities Rules for Banks

 OFR Annual Report

The Economist: HFT is Frequent but Inefficient



Dec 022014

On November 20th, the Center for Financial Policy and the Mutual Funds Directors Forum hosted a conference on best execution for mutual funds.  This day-long conference fostered a lively discussion among mutual fund directors, academics and regulators on the impact of high frequency traders and rebate programs in the equity market, and the complexities of the fixed income market have on mutual funds.

Gregg E. Berman Ph.D, Associate Director, Office of Analytics and Research, Division of Trading and Markets at the United States Securities and Exchange Commission, kicked off the event. Dr. Berman provided insights on market structures and more specifically dark pools ­– venues where orders come in, but aren’t broadcast as they are on an exchange. He explained that full transparency is the goal, but dark pools, alternative trading systems and the exchanges still do not account for all of the trades executed.  Many transactions happen within the broker-dealers trading room where brokers internally cross customer orders.  Dr. Berman urged the mutual fund directors to participate in the dialogue between their trading managers and broker-dealers on best execution.  He also highlighted the information advantage large mutual fund managers have over smaller firms, noting this discrepancy may be more important than issues with dark pools when it comes to best execution.

James Angel, Associate Professor at Georgetown University and author of “Equity Trading in the 21st Century,” was the keynote speaker.  His talk posed the question — are markets “rigged?”  He highlighted the populous’ ongoing and general distrust of financial markets.  In the 1980s, people blamed the specialists on the exchanges for manipulating the markets and now it is the high frequency traders (HFTs).  He outlined the positive aspects of high frequency trading, such as competitiveness, keeping transactions costs low, keeping the exchange traded fund (ETF) market competitive, and providing liquidity. On the downside, some high frequency traders can (and do) abuse the system through manipulation, putting in orders intended to trigger further orders, or by executing large short sales. Dr. Angel also provided multiple examples of improper and manipulative practices in the markets such as spoofing, which he defined as putting in an order with no desire to trade in an attempt to persuade other parties to alter their trades. Finally, Dr. Angel pointed out that markets are better than before, but also much more complex.  Institutional trading costs have fallen dramatically, a benefit conferred directly to investors and the pension funds asset managers trade on behalf of, but there are still improvements to be made in order to truly achieve best execution.

Professor Angel’s presentation