The reduction of systemic risk in the United States financial system

Harvard Journal of Law and Public Policy

Volumn 33, Issue 2, 2010, Pages 671-734

  Scott, Hal S ^a  

^a HARVARD LAW SCHOOL   (United States)

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EID: 78049266911     PISSN: 01934872     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (352)

1. COMM. ON CAPITAL MKTS. REGULATION, THE GLOBAL FINANCIAL CRISIS: A PLAN FOR REGULATORY REFORM (2009) [hereinafter CCMR PLAN FOR REGULATORY REFORM],
2. U.S. DEP'T OF THE TREASURY, FINANCIAL REGULATORY REFORM, A NEW FOUNDATION: REBUILDING FINANCIAL SUPERVISION AND REGULATION (2009) [hereinafter TREASURY WHITE PAPER],
3. H.R. 4173, 111th Cong, (as passed by House, Dec. 11, 2009);
4. STAFF OF S. COMM. ON BANKING, HOUS. & URBAN AFFAIRS, 111TH CONG., RESTORING AMERICAN FINANCIAL STABILITY ACT OF 2010 (Comm. Print 2010) [hereinafter SENATE PROPOSAL].
5. Committee on Capital Markets Regulation, Welcome, http://www.capmktsreg. org (last visited Mar. 1, 2010).
6. Id.
7. Id.
8. A recently released report by the Financial Stability Board, International Monetary Fund, and Bank for International Settlement suggests that "systemic risk" could also be defined as the risk of a "disruption to the flow of financial services that is (i) caused by an impairment of all or parts of the financial system; and (ii) has the potential to have serious negative consequences for the real economy." INT'L MONETARY FUND ET AL., REPORT TO G20 FINANCE MINISTERS AND GOVERNORS: GUIDANCE TO ASSESS THE SYSTEMIC IMPORTANCE OF FINANCIAL INSTITUTIONS, MARKETS AND INSTRUMENTS: INITIAL CONSIDERATIONS 5-6 (2009).
9. HAL S. SCOTT, INTERNATIONAL FINANCE: TRANSACTIONS, POLICY, AND REGULATION 173-74 (16th ed. 2009).
10. See Federal Deposit Insurance Corporation Improvement Act of 1991 § 308, 12 U.S.C.§ 3716-2 (2006).
11. Id.
12. Craig H. Furfine, Interbank Exposures: Quantifying the Risk of Contagion, 35 J. MONEY CREDIT & BANKING 111, 125 (2003);
13. see also Simon Wells, Financial Interlinkages in the United Kingdom's Interbank Market and the Risk of Contagion 5-7 (Bank of Eng., Working Paper No. 230, 2004) (looking at exposures in the U.K. interbank market and finding that although a single bank failure is rarely sufficient to cause other banks to fail it does have the potential to weaken their capital substantially).
14. SCOTT, supra note 8, at 174
15. Id.
16. Id. at 471.
17. Id. at 174
18. See Hal S. Scott, Editorial, Do We Redly Need a Systemic Reguldor?, WALL ST. J., Dec. 10, 2009, at A21.
19. THE PRESIDENT'S WORKING GROUP ON FIN. MKTS., HEDGE FUNDS, LEVERAGE, AND THE LESSONS OF LONG-TERM CAPITAL MANAGEMENT 19 (1999).
20. See generdly John H. Makin, Risk and Systemic Risk, AEI ECON. OUTLOOK, Sept. 2008, at 1, 1-2.
21. Robin Sidel, Dennis K. Berman & Kate Kelly, J.P. Morgan Buys Bear in Fire Sale, As Fed Widens Credit to Avert Crisis, WALL ST. J., Mar. 17, 2008, at A1;
22. see also Scott supra note 16.
23. See OFFICE OF THE SPECIAL INSPECTOR GEN. FOR THE TROUBLED ASSETS RELIEF PROGRAM, FACTORS AFFECTING EFFORTS TO LIMIT PAYMENTS TO AIG COUNTERPARTIES 29 (2009), [hereinafter SIGTARP];
24. see also Scott, supra note 16.
25. SIGTARP, supra note 19, at 16-17.
26. Id. at 9-10.
27. Id. at 10-11.
28. The Federd Bdlout of AIG: Hearing Before the H. Comm. on Oversight and Gov't Reform, 111th Cong. (2010) (statements of Timothy F. Geithner, Sec'y, U.S. Treasury Dep't & Thomas C. Baxter, Exec. Vice President and General Counsel, Fed. Reserve Bank of N.Y.).
29. But see Eric Dinallo, What I Learned d the AIG Meltdown, WALL ST. J., Feb. 3, 2010, at A17 (arguing that "insurance policyholders at AIG were protected by reserves that each of the insurance companies are required to hold by state regulation").
30. The International Monetary Fund provides a discussion of the systemic implications of financial linkages. INT'L MONETARY FUND, GLOBAL FINANCIAL STABILITY REPORT 73-110 (2009).
31. Press Release, The White House, Remarks by the President on Financial Reform (Jan. 21, 2010) [hereinafter Obama Remarks on Reform], available at http:// www.whitehouse.gov/the-press-office/remarks-president-financial-reforrn;
32. Prohibiting Certain High-Risk Investment Activities by Banks and Bank Holding Companies: Hearing Before the S. Comm. on Banking, Hous. & Urban Affairs, 111th Cong. (2010) (statements of Paul A. Volcker, Chairman, President's Econ. Recovery Advisory Bd., and of Neal S. Wolin, Deputy Sec'y, U.S. Dep't of the Treasury). For a more complete discussion of the impact of the "Volcker Rules,"
33. see Prohibiting Certain High-Risk Investment Activities by Banks and Bank Holding Companies: Hearing Before the S. Comm. on Banking, Hous. & Urban Affairs, 111th Cong. (2010) (statement of Hal S. Scott, Nomura Professor of Int'l Fin. Sys. at Harvard Law Sch. and Dir. of the Comm. on Capital Mkts. Regulation).
34. Obama Remarks on Reform, supra note 25.
35. Prohibiting Certain High-Risk Investment Activities by Banks and Bank Holding Companies: Hearing Before the S. Comm. on Banking, Hous. & Urban Affdrs, 111th Cong. (2010) (statement of Neal S. Wolin, Deputy Sec'y, U.S. Dep't of the Treasury).
36. GOLDMAN INV. RESEARCH, UNITED STATES: BANKS 6 (2009).
37. SENATE PROPOSAL, supra note 3, §§619-620;
38. see also Prohibiting Certain High-Risk Investment Activities by Banks and Bank Holding Companies: Hearing Before the S. Comm. on Banking, Hous. & Urban Affairs, 111th Cong. (2010) (statement of Paul A. Volcker, Chairman, President's Econ. Recovery Advisory Bd.) [hereinafter Volcker Testimony].
39. SENATE PROPOSAL, supra note 3, §§619(g), 620.
40. Id. §619 (b) (1).
41. Volcker Testimony, supra note 29 ("The basic point is that there has been, and remains, a strong public interest in providing a 'safety nef-in particular, deposit insurance and the provision of liquidity in emergencies-for commercial banks carrying out essential services. There is not, however, a similar rationale for public funds- taxpayer funds-protecting and supporting essentially proprietary and speculative activities. Hedge funds, private equity funds, and trading activities unrelated to customer needs and continuing banking relationships should stand on their own, without the subsidies implied by public support for depository institutions.").
42. Under Section 113, the Financial Stability Oversight Council "may determine that a U.S. nonbank financial company shall be supervised by the [Federal Reserve] if the Council determines that material financial distress at the U.S. nonbank financial company would pose a threat to the financial stability of the United States." SENATE PROPOSAL, supra note 3, § 113(a)(1).
43. Id. §619(f) (1).
44. See BASEL COMM., INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS 3 (1988), http://www.bis.org/pubVbcbsc111.pdf?.
45. See Press Release, Bd. of Governors of the Fed. Reserve Sys. et al., Banking Agencies Reach Agreement on Basel II Implementation (July 20, 2007), avdlable at http:// federalreserve.gov/newsevents/press/bcreg/20070720a.htm.
46. See 17 C.F.R. §§200.30-3, 240.3a4-2 to -6, 240.3a5-1, 240.3b-17 to -18, 240.15a-7 to -9 (2004).
47. CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 60.
48. JOINT ECON. COMM. MAJORITY STAFF, FROM WALL STREET TO MAIN STREET: UNDERSTANDING How THE CREDIT CRISIS AFFECTS You 4 (2008).
49. Id.
50. CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 60.
51. BASEL COMM., supranote 35, at 13.
52. 12 C.F.R. §208.43(b)(1)(i) (2009).
53. 12 C.F.R. § 208.43(b)(1) (iii).
54. CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 80;
55. see also TREASURY WHITE PAPER, supra note 2, at 11 (recommending strengthening capital requirements at all banks).
56. CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 80-81.
57. Id.
58. Id. at 81;
59. TREASURY WHITE PAPER, supra note 2, at 80.
60. See FIN. SERV. AUTH., THE TURNER REVIEW: A REGULATORY RESPONSE TO THE GLOBAL BANKING CRISIS 63 (2009) (discussing the Spanish dynamic provisioning system).
61. CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 81.
62. FASB Chairman Bob Herz has also endorsed this approach. Robert H. Herz, Chairman, Fin. Accounting Standards Bd., Remarks to AICPA National Conference on Current SEC and PCAOB Developments 15 (Dec. 8, 2009), available at http://www.fasb.org/cs/ContentServer?c=Document-C&pagename=FASB/Document-C/ DocumentPage&cid=1176 156571228.
63. Both U.S. GAAP and IFRS accounting rules operate according to an incurred loss model under which a financial institution records an impairment only after the associated financial asset is known to have incurred a loss. This principle governs even when the exact loss amount is not known with specificity and must be estimated based on past experience (for example, in the case of receivables, losses on which may be known to have been incurred but not identified specifically). Expected future losses, by contrast, are not reserved against under the incurred loss model and thus are not deducted from income. CODIFICATION OF ACCOUNTING STANDARDS AND PROCEDURES §§ 5,114 (Am. Inst. of Certified Pub. Accountants 2009).
64. The incurred loss model is a staple of both U.S. GAAP and IFRS accounting, but has been subject to recent criticism and challenge, for example in the International Accounting Standards Board's November 2009 exposure draft outlining a proposed expected loss model to replace the incurred loss model in connection with financial asset reporting. Press Release, Int'l Accounting Standards Bd., IASB publishers proposal on the impairment of financial assets (Nov. 5, 2009), available at http://www.iasb.org/News/Press+Releases/ IASB+publishes+proposals+on-(the+impairment+of+financial+assets.htm.
65. see also Mark Flannery, No Pain, No Gain? Effecting Market Discipline via Reverse Convertible Debentures, in CAPITAL ADEQUACY BEYOND BASEL: BANKING, SECURITIES, AND INSURANCE (Hal S. Scott ed., 2005);
66. Anil K. Kashyap et al., Rethinking Capital Regulation, in MAINTAINING STABILITY IN A CHANGING FINANCIAL SYSTEM 431, 449-50 (2008), available at www.kc.frb.org/publicat/sympos/2008/kashyapRajanStein.03.12.09.pdf.
67. CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 81;
68. TREASURY WHITE PAPER, supra note 2, at 24
69. CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 81;
70. TREASURY WHITE PAPER, supranote 2, at 80-81.
71. BASEL COMM. ON BANKING SUPERVISION, CONSULTATIVE DOCUMENT, STRENGTHENING THE RESILIENCE OF THE BANKING SECTOR 60 (2009), http://www.bis.org/ publ/bcbsl64.pdf.
72. BASEL COMM., supra note 35, at 13; CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 62.
73. Jacob Gyntelberg et al., Overview: cautious optimism on gradual recovery, BIS Q. REV., Sept. 2009, at 1, 2. The quantitative impact studies are available at http:// www.bis.org/bcbs/qis/index.htm.
74. See H.R. 4173,111th Cong. §1104(a)(2)(A)(i) (2009);
75. SENATE PROPOSAL, supra note 3, §165(b)(1)(A)(i).
76. See DwIGHT R. LEE & RICHARD B. MCKENZIE, FAILURE AND PROGRESS: THE BRIGHT SIDE OF THE DISMAL SCIENCE 56 (1993);
77. Fiona M. Scott Morton, The Problems of Price Controls, REGULATION, Spring 2001, at 50.
78. Andrew Kuritzkes & Hal Scott, Op-Ed., Markets are the best judge of bank capital, FT.COM, Sept. 23, 2009, http://www.ft.com/cms/2ca160b0-a870- 11de9242-00144feabdc0.html.
79. Id.
80. Id.
81. Id.
82. CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 27.
83. U.S. SHADOW FIN. REGULATORY COMM., REFORMING BANK CAPITAL REGULATION 42 (2000).
84. See, e.g., Bert Ely, Sub debt - silver bullet or big dud?, FIN. REG., Sept. 2000, at 32.
85. Oliver Hart & Luigi Zingales, A New Capital Regulation for Large Financial Institutions (Ctr. for Econ. Policy Research, Discussion Paper No. DP7298, 2009), available at http://faculty.cMcagobootii.edu/luigi.zingales/ research/papers/a-new-capital-regulation.pdf. There would be significant issues with using these market signals as a basis for federal intervention into the affairs of a bank, as suggested by the authors, due to the unreliability of credit-default-swap (CDS) spreads in a crisis resulting from the lack of liquidity and trading in the instrument. This was the case during the past crisis when, for example, Goldman Sachs and Morgan Stanley saw their CDS spreads shift hundreds of points in a single trading day. Even JPMorgan, too, saw its spreads widen to levels approaching those of junk bonds.
86. See Alistair Barr, Fate of remaining big independent brokers in focus, MARKET WATCH. COM, Sept. 15, 2008, http://www.marketwatch.com/story/fate-of- remaining-big-brokersin-focus-after-lehman-collapse;
87. John Beck, CDS spreads tighten as bailout is revised, RIK.COM, Oct. 1, 2008, http://www.risk.net/risk-magazine/news/1503631/cds-spreadstighten-bailout- revised;
88. Ryan Vlastelica, Morgan Stanley CDS Spreads Plunge 183 BPS;
89. Goldman Sachs, Merrill, Wachovia CDS Fall, FORBES.COM, Sept. 19, 2008, http:// www.forbes.com/feeds/afx/2008/09/19/afx5446908.html.
90. CFA INST., DERIVATIVES AND ALTERNATIVE INVESTMENTS, at G-11 (2008).
91. See BD. OF GOVERNORS OF THE FED. RESERVE SYS., THE SUPERVISORY CAPITAL ASSESSMENT PROGRAM: DESIGN AND IMPLEMENTATION (2009).
92. BASEL COMM., supra note 35, at 4
93. Federal Deposit Insurance Corporation Improvement Act of 1991, 12 U.S.C. § 1831n (2006).
94. Herz, supra note 50, at 7.
95. CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 56.
96. LCH. Clearnet, Interest Rate Swaps, http://www.lchclearnet.com/swaps/ swapclear-for-clearing-members/ (last visited Mar. 26,2010).
97. Id.
98. The counterparty would not fail of course, if it had cash collateral (apparently the case of Goldman Sachs with AIG). Failure would be highly unlikely if the collateral were treasury notes due to the depth of liquidity in that market. See Telephone Conference Call with David Viniar, CFO of Goldman Sachs, Goldman Sachs Business Update (Mar. 20, 2009), transcript available at http://www.scribd.com/doc/ 13465855/Preliminary-GS-Conference-Call-Transcript.
99. EUR. CENT. BANK, CREDIT DEFAULT SWAPS AND COUNTERPARTY RISK 48-49 (2009).
100. See CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 42;
101. SCOTT, supra note 8, at 507-08.
102. Letter from Senior Mgmt. of Bank of America-Merrill Lynch et al. to William C. Dudley, President, Fed. Reserve Bank of N.Y. (Sept. 8, 2009), available at http:// www.newyorkfed.org/newsevents/news/markets/2009/ma090908c. pdf.
103. CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 46;
104. Letter from the Sen. Comm. on Capital Mkts. Regulation to Chairman Christopher Dodd et al., Re: Centralized Clearing and Exchange Trading of Derivatives Contracts (Mar. 4 2010) [hereinafter CCMR Derivatives Letter], available at http://www.capmktsreg.org/.
105. Over-The-Counter Derivatives: Modernizing Oversight to Increase Transparency and Reduce Risks: Hearing Before the Subcomm. on Sec., Ins., and Inv. of the S. Comm. on Banking, Hous. & Urban Affairs, 111th Cong. 6-7 (2009) (statement of Gary Gensler, Chairman, Commodity Futures Trading Comm'n).
106. See BMO Capital Markets, Credit Default Swaps, http://www.bmocm.com/ products/marketrisk/credit/swaps/default.aspx (last visited Mar. 1, 2010).
107. See INT'L SWAPS & DERIVATIVES ASS'N, 2009ISDA CREDIT DERIVATIVES DETERMINATIONS COMMITTEES AND AUCTION SETTLEMENT SUPPLEMENT TO THE 2003 ISDA CREDIT DERIVATIVES DEFINITIONS 5-7 (2009);
108. Client Alert, White & Case, ISDA Announces Changes to Credit Default Swaps Due to Take Effect in March 2009 (Mar. 3, 2009), available at www.whitecase.com/alert-securities-derivatives-isda.030309.
109. See Shane Kite, Paper Plain: Default Pacts Resisting Electrons, SEC. INDUSTRY NEWS, Nov. 16,2009, http://securitiesindustry.com/issues/21-21/-24255- 1.html?pg-1.
110. Statistical Annex, BIS Q. REV., Dec. 2009, at Al, A10.
111. CCMR PLAN FOR REGULATORY REFORM, supra note 1, at 46;
112. TREASURY WHITE PAPER, supranote 2, at 7;
113. CCMR Derivatives Letter, supra note 80, at 10.
114. CCMR Derivatives Letter, supra note 80, at 11-12.
115. Id. at 11.
116. See, e.g., H.R. 4173, 111th Cong. §§3102(a)(3), 3203(a).
117. For example, Sections 713(a)(3) and 753(a) of the Senate draft provide for a clearinghouse to submit to the CFTC or SEC for pre-approval any "group, category, type, or class" of swaps that the clearinghouse seeks to clear. These sections would also give the CFTC or SEC, in consultation with the Financial Stability Oversight Council power to exempt from clearing requirements any swap where one of the counterparties (a) is not a swap or dealer or major swap participant and (b) is ineligible for membership in any clearing organization that clears the swap.
118. SENATE PROPOSAL, supra note 3, §§ 713(a)(3), 753(a).
119. Id. §§804 (a) (1), 805.
120. Both the House and Senate proposals require contracts between "swap dealers" to be centrally cleared. See H.R. 4173, 111th Cong. §3103(a) (4) (2009) (amending the Commodity Exchange Act by inserting §2(j)(8)(A));
121. SENATE PROPOSAL, supra note 3, § 713(a)(3). Although clearinghouses are composed mainly of dealers, not all dealers who enter into swaps may be members and not all participants in a clearinghouse may be dealers. I focus on requiring participant rather than dealer contracts to be centrally cleared because a requirement that all dealer contracts be centrally cleared exposes the clearinghouse to potential risk from poorly capitalized dealers .
122. Discussions with industry sources indicate that the higher figure (65%) results from the classification of certain hedge-fund-to-prime-broker trades, as in effect, dealer-to-dealer. The Bank for International Settlements reports that in the first half of 2009 dealer-dealer CDS contracts were approximately 53% of outstanding CDS contracts by notional value. BANK FOR INT'L SETTLEMENTS, OTC DERIVATIVES MARKET ACTIVITY IN THE FIRST HALF OF 2009, at 8 (2009).
123. The Depository Trust and Clearing Corporation (DTCC) reports that as of December 11, 2009, approximately 80% of the total notional value of CDSs in its Deriv/SERV Trade Information Warehouse are dealer-to-dealer swaps. The DTCC reports that approximately 90% of CDSs traded throughout the world are cleared through the Deriv/SERV Trade Information Warehouse. See DTCC, Deriv/SERV Trade Information Warehouse Reports, http://www.dtcc.com/products/derivserv/data (last visited Mar. 1, 2010).
124. BANK FOR INT'L SETTLEMENTS, supra note 93, at 6-7.
125. H.R. 4173,111th Cong. §3101(a)(3) (2009) (amending the Commodity Exchange Act by inserting §la(38)(A)).
126. Id. §3103(a)(4) (amending the Commodity Exchange Act by inserting § 2(j)(8)(A)), §3203(a) (amending the Securities Exchange Act by inserting §3B(h)(1)).
127. Id. §3101(a)(3) (amending the Commodity Exchange Act by inserting§1a(38)(A)).
128. See id. §3101(a)(3) (amending the Commodity Exchange Act by inserting § 1a(39)(A));
129. see also SENATE PROPOSAL, supra note 3, §711(a)(7).
130. The clearing requirement does not apply only if one of the counterparties is not a swap dealer or major swap participant and able to demonstrate the use of such swaps for mitigating business, operating, or commercial risk in a manner that accounts for the financial obligations associated with non-cleared swaps.
131. H.R. 4173 §3103(a)(4) (amending the Commodity Exchange Act by inserting §2(j)(8)(A));
132. id. §3203(a) (amending the Securities Exchange Act by inserting §3B(h)(1)).
133. SENATE PROPOSAL, supra note 3, §713(a)(3) (amending the Commodity Exchange Act by inserting §2(j)).
134. Id. (amending the Commodity Exchange Act by inserting §(9)(B)).
135. A "swap dealer" is "any person engaged in the business of buying and selling swaps for such person's own account, through a broker or otherwise...The term 'swap dealer' does not include a person that buys or sells swaps for such person's own account, either individually or in a fiduciary capacity, but not as a part of a regular business." Id. § 711 (a) (5).
136. See id. §711 (a) (7).
137. See id. § 713 (a) (3) (amending the Commodity Exchange Act by inserting § 2(j)).
138. See infra Part VI.
139. H.R. 4173, 111th Cong. § 3122 (2009) (amending the Commodity Exchange Act by inserting §4u), §3203(e) (amending the Securities Exchange Act by inserting §3D);
140. S ENATE P ROPOSAL, supra note 3, §718 (amending the Commodity Exchange Act by inserting §4t).
141. HR. 4173 § 3122.
142. Darrell Duffie & Haoxiang Zhu, Does a Central Clearing Counterparty Reduce Counterparty Risk? (July 1, 2009) (unpublished manuscript), available at http://www.stanford.edu/~duffie/DuffieZhu.pdf.
143. T REASURY W HITE P APER, supra note 2, at 48.
144. HR. 4173, § 3107 (amending the Commodity Exchange Act by inserting § 4s(d)), §3204 (amending the Securities Exchange Act by inserting §15F(d)).
145. Id. Prudential regulators will set collateral and margin requirements for swaps where banks or bank holding companies are end users, and the CFTC and SEC will do the same where non-bank swap dealers or major swap participants, for which there is no prudential regulator, are end users. Id. The Senate draft, in contrast, envisions that capital requirements will be set by "primary financial regulatory agencies," with the CFTC and SEC doing so for all non-bank dealers and major swap participants.
146. S ENATE P ROPOSAL, supra note 3, §717 (amending the Commodity Exchange Act by inserting §4s(e)(1)).
147. H.R. 4173, § 3107 (amending the Commodity Exchange Act by inserting § 4s(d)(1)(A)-(B)); id. §3204 (amending the Securities Exchange Act by inserting § 15F(d)(1) (A)-(B)).
148. S ENATE P ROPOSAL, supra note 3, §717 (amending the Commodity Exchange Act by inserting §4s(e)(3)(A)).
149. Id. (amending the Commodity Exchange Act by inserting §4s(e) (3) (B) & (C)).
150. Id. (amending the Commodity Exchange Act by inserting §4s(e)(4)(A)(i)-(B)(i)).
151. Id. (amending the Commodity Exchange Act by inserting §4s(e)(4)(A)(ii)).
152. Id. (amending the Commodity Exchange Act by inserting §4s(e)(5)).
153. Darrell Duffie & Haoxiang Zhu, Does a Central Clearing Counterparty Reduce Counterparty Risk? 1 (Rock Ctr. For Corp. Gov. at Stanford Univ., Working Paper No. 46, Feb. 27, 2009).
154. CCMR P LAN FOR R EGULATORY R EFORM, supra note 1, at 43;
155. CCMR Derivatives Letter, supra note 80, at 20.
156. See Jeremy Grant & Nikki Tait, European CDS clearing hits hurdle, F IN. T IMES, Jan. 13, 2009, at 23;
157. Press Release, Charlie McCreevy, Eur. Comm'r for Internal Mkts. & Servs., Eur. Comm'n, Statement on Reviewing Derivatives Markets Before the end of the Year: Time for Regulators to get a Better View of Derivatives (Oct. 17, 2008), avdiable at http://europa.eu/rapid/pressReleasesAction.do?reference= SPEECH/08/ 538&format=HTML&aged=0&language=EN&guiLanguage=fr.
158. CCMR Derivatives Letter, supra note 80, at 21.
159. At the same time, the basic models should be consistent in terms of operational functionality. For example, clearing should be available on a same day basis given timely submission, clients should be able to engage multiple Futures Commission Merchants, and there should be options to the client in failure to clear situations.
160. The CCMR "acknowledges that some of its members do not believe there are risk management benefits to be gained by limiting clearinghouses to one asset class, and they are concerned that organizing [clearinghouses] by asset class will substantially increase the cost of clearing since there will be less risk diversification and netting, and because it will not be possible to spread the cost of capitalizing [clearinghouses] ."
161. CCMR Derivatives Letter, supra note 80, at 22.
162. Interoperability, flowing from a requirement that clearinghouses allow participants to move open positions from one clearinghouse to another, could bring benefits to the market. "In practice, however, operational, legal, and risk-management issues make interoperability difficult and costly for the foreseeable future. Interoperability should be a design element for [clearinghouses] for future consideration." FED. RESERVE BANK OF N.Y., P OLICY P ERSPECTIVES ON OTC D ERIVATIVES M ARKET I NFRASTRUCTURE 14 (2010).
163. BANK FOR INT'L SETTLEMENTS, R ECOMMENDATIONS FOR C ENTRAL C OUNTERPARTIES (2004).
164. JOINT REGULATORY AUTHS. OF LCHCLEARNET GROUP, I NVESTIGATION OF R ISKS A RISING FROM THE E MERGENCE O F M ULTI-C LEARED T RADING P LATFORMS (2008). The Joint Regulatory Authorities include regulators in Belgium, France, the Netherlands, Portugal, and the UK that have supervisory authority over LCH. Clearnet Group.
165. See George Kalogeropoulos, Daniela Russo & Andreas Schönenberger, Link Arrangements of Central Counterparties in the EU- Results of an ESCB Survey, in T HE R OLE OF C ENTRAL C OUNTERPARTIES 50 (2007) (providing a listing of linkages between CCPs).
166. H.R. 4173, 111th Cong. §3306(a)(2)(D) (2009) (amending the Commodity Exchange Act by revising §5d(15));
167. id. §3306(b)(2)(D) (amending the Securities Exchange Act by inserting §17A(b)(3)(J)).
168. See S ENATE P ROPOSAL, supranote 3, § 719.
169. CCMR P LAN FOR R EGULATORY R EFORM, supra note 1, at 48-49;
170. CCMR Derivatives Letter, supra note 80, at 24. TRACE stands for "Trade Reporting and Compliance Engine."
171. H.R. 4173 §§3103(a)(3), 3103(b)(3), 3109, 3203(a);
172. S ENATE P ROPOSAL, supra note 3, §§713(a)(3), 713(b)(4), 753(a).
173. H.R. 4173 §3104 (amending the Commodity Exchange Act by inserting §8(j)), § 3203(a) (amending the Securities Exchange Act by inserting §3B(j)(2));
174. S ENATE P ROPOSAL, supra note 3, §713(a)(2) (amending the Commodity Exchange Act by inserting §30(j)6)).
175. S ENATE P ROPOSAL , supra note 3, §713(b)(3) (amending the Commodity Exchange Act by inserting §5b(c)(2)(L)).
176. See Donna Block, Swap Meet, D EAL M AG., Oct. 31, 2008, at 18.
177. See CCMR P LAN FOR R EGULATORY R EFORM, supra note 1, at 50;
178. CCMR Derivatives letter, supra note 80, at 26.
179. H.R. 4173 §3103(a)(4) (amending the Commodity Exchange Act by inserting § 2(k)(1)), §3203(c) (amending the Securities Exchange Act by inserting §5A(a)(1)). The House bill defines a "swap execution facility" as a "person or entity that facilitates the execution or trading of swaps between two persons through any means of interstate commerce, but which is not a designated contract market, including any electronic trade execution or voice brokerage facility." Id. §3101(a)(3) (amending the Commodity Exchange Act by inserting §1a(49)), §3201(a)(6) (amending the Securities Exchange Act by inserting §3(a)(77)). To be registered, such a swap execution facility would need to comply with certain requirements, including a requirement to maintain rules designed to prevent market manipulation. Id. §3109 (amending the Commodity Exchange Act by inserting §5h(d)), §3203(d) (amending the Securities Exchange Act by inserting §3C(d)).
180. S ENATE P ROPOSAL, supra note 3, §§713(a)(3), 753(a). The Senate draft defines an "alternative swap execution facility" as an "electronic trading system with pre-trade and post-trade transparency in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the system, but which is not an exchange." Id. §720. As under the House bill, to be registered, such an "alternative swap execution facility" must set position limits or position accountability requirements for contracts that are meant to stop market manipulation and congestion. See id. §§720, 753(b).
181. In the case of CDSs, for example, exchange-trading would increase liquidity in the CDS market and would allow small investors to trade credit risk more easily. Mike Jakola, Credit Default Swap Index Options: Evaluating the Viability of a New Product for the CBOE 8 (June 2, 2006) (unpublished manuscript), avdiable at http://www.kellogg.northwestern.edu/research/fimrc/ papers/jakola.pdf.
182. See SYLVIE A. DURHAM, T ERMINATING D ERIVATIVE T RANSACTIONS: R ISK M ITIGATION AND C LOSE-O UT N ETTING §6.9 (2009).
183. The SECs formal definition of an "alternative trading system" is any organization, association, person, group of persons, or system: (1) [t]hat constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16 under the Securities Exchange Act of 1934; and (2) [t]hat does not: (i) [s]et rules governing the conduct of subscribers other than the conduct of such subscribers' trading on such organization, association, person, group of persons, or system; or (ii) [d]iscipline subscribers other than by exclusion from trading.
184. Regulation of Exchanges and Alternative Trading Systems, 17 C.F.R. §242.300 (2009).
185. H.R. 4173 §1951(a)(3) (amending the International Banking Act of 1978 by inserting §7(d)(3)(E)), §1951(c) (amending the Securities Exchange Act by inserting §15(k)).
186. Id. §1951(b)(3) (amending the International Banking Act of 1978 by inserting § 7(e)(1)(C)). §1951(c) (amending the Securities Exchange Act by inserting §15(1)).
187. See 11 U.S.C. §§362(b)(6), 555, 556 (2006).
188. FED. DEPOSIT INS. CORP., A DJUSTING THE R ULES: W HAT B ANKRUPTCY R EFORM W ILL M EAN FOR F INANCIAL M ARKET C ONTRACTS, FYI: A N U PDATE ON E MERGING I SSUES IN B ANKING (2005).
189. FDIC conservatorship extends to an institution's qualified financial contracts (QFCs), including derivatives products. See 12 U.S.C. §1822 (2006);
190. FED. DEPOSIT INS. CORP., S TATEMENT OF P OLICY ON Q UALIFIED F INANCIAL C ONTRACTS (1989).
191. See Carol J. Loomis, Derivatives: The Risk that Still Won't Go Away, F ORTUNE, July 6,2009, at 55,57-58 (describing the handling of Lehman's derivatives book as it neared bankruptcy);
192. Scott, supra note 16.
193. Eric S. Rosengren, President & CEO, Fed. Reserve Bank of Boston, Remarks at the Institute of Regulation and Risk North Asia: Challenges in Resolving Systemically Important Financial Institutions (May 5, 2009), avdiable at http:// www.bos.frb.org/news/speeches/rosengren/2009/050509.htm.
194. 12 U.S.C. §§1811-1835a(2006).
195. Sheila Bair, Chairman, Fed. Deposit Ins. Corp., Remarks to the Economic Club of New York (Apr. 27, 2009), available at http://www.fdic.gov/news/news/ speeches/chairman/spapr2709.html.
196. See R. Glenn Hubbard, Hal Scott & Luigi Zingales, Editorial, Banks Need Fewer Carrots and More Sticks, W ALL S T. J., May 6, 2009, at A15.
197. U.S. DEP'T OF THE TREASURY, TARP C APITAL P URCHASE P ROGRAM: S ENIOR P REFERRED S TOCK AND W ARRANTS (2008).
198. CCMR P LAN F OR R EGULATORY R EFORM, supra note 1, at 113.
199. See T REASURY W HITE P APER, supra note 2, at 76-78.
200. 15 U.S.C. §§78aaa-78111 (2006).
201. See H.R. 4173, 111th Cong. §1602(9) (2009);
202. S ENATE P ROPOSAL, supra note 3, § 201(7), (8), (11). For an explanation of which companies are subject to stricter prudential regulation, see infra notes 241-47 and accompanying text.
203. See S ENATE P ROPOSAL, supra note 3, §201(6). However, the bill also provides that the FDIC will appoint the SIPC to act as a trustee for any covered broker or dealer that has entered into receivership. Thus, subject to certain limitations, broker-dealers are governed by SIPA under the Senate draft.
204. S ENATE P ROPOSAL, supra note 3, §205(a)-(b).
205. H.R. 4173, §1603(b);
206. accord S ENATE P ROPOSAL, supra note 3, §203(b).
207. S ENATE P ROPOSAL, supra note 3, §202(b)(1).
208. Id. §202(a)(2).
209. Id. §202(b)(1)(A)(iii).
210. Id. §202(b)(2)(A)(i).
211. Id. §202(b)(2)(B)(i).
212. H.R. 4173 §1603(a)-(b);
213. S ENATE P ROPOSAL, supra note 3, §203(a)-(b).
214. In contrast, the White Paper's proposal for advance branding of institutions for the purpose of deciding what institutions the Federal Reserve would supervise-socalled Tier I financial service holding companies-does create these problems. See T REASURY W HITE P APER, supra note 2, at 76.
215. H.R. 4173 §1602(9)(F).
216. Id. §1604(e).
217. See id. § 1602(9)(D).
218. See id. § 1602(9) (B)(v).
219. S ENATE P ROPOSAL, supra note 3, §201(7)(b).
220. Id. § 203 (e).
221. CCMR P LAN F OR R EGULATORY R EFORM, supra note 1, at 124
222. Peter J. Wallison, Reinventing GSEs: Treasury's Plan for Financial Restructuring, AEI F IN. S ERVICES O UTLOOK, Mar./Apr. 2009, at 3,5. This might be true for the Treasury proposal, which would only be used for "systemically important" institutions, but not under the CCMR's proposed regime for handling failed financial companies that do not pose a systemic risk.
223. See CCMR P LAN FOR R EGULATORY R EFORM, supra note 1, at 125.
224. S ENATE P ROPOSAL, supra note 3, § 202 (d) (1).
225. 12 U.S.C. § 1823 (c)(4) (2006).
226. See H.R. 4173,111th Cong. §1609 (2009).
227. S ENATE P ROPOSAL, supra note 3, §202(d)(1).
228. 12 U.S.C. §1821(e)(9).
229. S ENATE P ROPOSAL, supra note 3, § 210(c) (9).
230. Id. §210(c)(10)(B)(i).
231. H.R. 4173 §§1604(d)(1)-(4), 1604(f)(2)-(4);
232. see also H.R. 4173 §1609(b)(1) (establishing a priority of claims whereby unsecured claims would be paid only after "administrative expenses of the receiver" and "any amounts owed to the United States, unless the United States agrees or consents otherwise").
233. H.R. 4173 § 1609(a)(4)(D)(ii)(I).
234. H.R. 4173 § 1609(a)(4)(D)(iv), (v).
235. S ENATE P ROPOSAL, supra note 3, §206.
236. Id. § 210(a)(3)(D).
237. See Scott, supra note 16.
238. Wallison, supra note 172, at5.
239. H.R. 4173 §1603(b)(2);
240. S ENATE P ROPOSAL, supra note 3, §202(a)(2)(B).
241. H.R. 4173 §1603(b)(3);
242. S ENATE P ROPOSAL, supra note 3, §202(b)(3).
243. U.S. DEP'T OF THE TREASURY, P ROPOSED R ESOLUTION A UTHORITY FOR S YSTEMATICALLY S IGNIFICANT F INANCIAL C OMPANIES A CT OF 2009, at 59-60 (2009), avdiable at http://www.ustreas.gov/press/releases/reports/0325091egislation.pdf.
244. S ENATE P ROPOSAL, supra note 3, §210(n)(5).
245. Id. § 210 (n) (9) (A).
246. Id. § 210 (n) (6).
247. Id. § 210(0) (1) (B).
248. H.R. 4173, 111th Cong. §1609(o)(1)(A) (2009).
249. Under the House bill "financial companies" include bank holding companies, companies that have been subjected to stricter prudential regulation by the Financial Services Oversight Council insurance companies, companies "predominantly engaged in activities that are financial in nature or incidental thereto," and any subsidiary of the foregoing; provided, however, that the term does not include broker-dealer subsidiaries, insured depository institutions, or certain government-sponsored entities (including Fannie Mae and Freddie Mac). Id. §1602(9).
250. Id. §1609(n)(6)(C).
251. S ENATE P ROPOSAL, supra note 3, §210(o)(2).
252. Id. § 210 (o) (4).
253. H.R. 4173 § 1609 (n) (7)-(8).
254. See H.R. 4173 §1609(a)(1)(L);
255. S ENATE P ROPOSAL, supra note 3, §210(a)(1)(N);
256. CCMR P LAN FOR R EGULATORY R EFORM, supra note 1, at 212;
257. T REASURY W HITE P APER, supra note 2, at 80.
258. Although the Federal Reserve is the primary lender of last resort in the U.S. financial system, other government agencies play a supporting role. For example, on September 19, 2008, the Treasury Department announced that it would temporarily guarantee the share price of all institutional and retail money market funds willing to pay a fee to participate in the guarantee program. Press Release, U.S. Dept. of the Treasury, Treasury Announces Temporary Guarantee Program for Money Market Funds (Sept. 29, 2008), available at http://www.treas.gov/press/ releases/hp1161.htm. The Treasury allowed the guarantee to expire approximately one year later.
259. Press Release, U.S. Dept. of the Treasury, Treasury Announces Expiration of Guarantee Program for Money Market Funds (Sept. 18, 2009), available at http://www.ustreas.gov/press/releases/tg293.htm.
260. Press Release, Bd. of Governors of the Fed. Reserve Sys. (June 25, 2009), avdlable at http://www.federalreserve.gov/monetarypoUcy/20090625a.htm.
261. Scott, supra note 16. Although TAF does not have a definite expiration date, the Federal Reserve has announced that it expects TAF to continue to be scaled back during early 2010. Press Release, Fed. Open Mkt. Comm. of the Bd. of Governors of the Fed. Reserve Sys. (Dec. 16, 2009) [hereinafter Fed. Open Mkt. Comm.].
262. HAL S. SCOTT, T HE G LOBAL F INANCIAL C RISIS 21-32 (2009). TSLF was set to expire on February 1,2010. Fed. Open Mkt. Comm., supranote 204
263. SCOTT, supra note 205. This program, which is referred to as the "Primary Dealer Credit Facility," was set to expire on February 1, 2010. Fed. Open Mkt. Comm., supra note 204
264. SCOTT, supra note 205. AMLF was set to expire on February 1, 2010. Fed. Open Mkt. Comm., supranote 204
265. SCOTT, supra note 205. CPFF was set to expire on February 1, 2010. Fed. Open Mkt. Comm., supranote 204
266. SCOTT, supranote 205. MMIFF expired on October 30,2009. Federalreserve.gov http://Federalreserve.gov, Money Market Investor Funding Facility, http://www.federalreserve.gov/monetarypolicy/mmiff.htm (last visited Feb. 11, 2010).
267. Although previously expected to expire on December 30, 2009, the period for TALF loans extended against newly issued ABS and legacy CMBS was extended to March 31, 2010, and the period for TALF loans against newly issued CMBS to June 30, 2010. Fed. Reserve Bank of N.Y., Term Asset-Backed Securities Loan Facility: Frequently Asked Questions, http://www.newyorkfed.org/markets/talf- faq.html (last visited Mar. 27, 2010).
268. The Federal Reserve has indicated that it anticipates purchasing $1.25 trillion of agency mortgage-backed securities by the end of the first quarter of 2010. Press Release, Bd. of Governors of the Fed. Reserve Sys., FOMC statement (Dec. 17, 2009), available at http://www.federa]reserve.gov/ newsevents/press/monetary/20091216a.htm. It is unclear whether the Federal Reserve will continue to purchase GSE mortgage-backed securities after this point.
269. As of September 2009, the Federal Reserve marked down this loan to $4 billion. Henry Sender, Fed carrying losses from Bear portfolio, F IN. T IMES, Feb. 16, 2010, at 8.
270. Press Release, Bd. of Governors of the Fed. Reserve Sys. & Dep't of the Treasury, U.S. Treasury and Federal Reserve Announce Participation in AIG Restructuring Plan (Mar. 2, 2009), available at http://www.federalreserve.gov/ newsevents/press/other/20090302a.htm;
271. Press Release, Bd. of Governors of the Fed. Reserve Sys. (Nov. 10, 2008), available at http://www.federalreserve.gov/ newsevents/press/other/20081110a. htm;
272. Press Release, Bd. of Governors of the Fed. Reserve Sys. (Sept. 16, 2008), available at http://www.federalreserve.gov/newsevents/press/other/ 20080916a.htm.
273. Press Release, Bd. of Governors of the Fed. Reserve Sys. et al., Treasury, Federal Reserve, and the FDIC Provide Assistance to Bank of America (Jan. 16, 2009), avdlable at http://www.federalreserve.gov/newsevents/press/ bcreg/20090116a.htm;
274. Press Release, Bd. of Governors of the Fed. Reserve Sys. et al., Joint Statement by Treasury, Federal Reserve, and the FDIC on Citigroup (Nov. 23, 2008), available at http://www.federalreserve.gov/newsevents/press/bcreg/ 20081123a.htm.
275. BD. OF GOVERNORS OF THE FED. RESERVE SYS., F EDERAL R ESERVE S TATISTICAL R ELEASE H.4.1 F ACTORS A FFECTING R ESERVE B ALANCES OF D EPOSITORY I NSTITUTIONS A ND C ONDITION S TATEMENT OF F EDERAL R ESERVE B ANKS, JUNE 4 2009 (2009).
276. BD. OF GOVERNORS OF THE FED. RESERVE SYS., F EDERAL R ESERVE S TATISTICAL R ELEASE H.4.1 F ACTORS A FFECTING R ESERVE B ALANCES OF D EPOSITORY I NSTITUTIONS AND C ONDITION S TATEMENT OF F EDERAL R ESERVE B ANKS, FEBRUARY 4 2010 (2010).
277. In March 2009, the Senate twice voted to require the Federal Reserve to release more details of its lending program, including collateral. Steven Sloan, With Senate Demands, Fed's Role in Jeopardy, A M. B ANKER, Apr. 6, 2009, at 1, 5.
278. See KENNETH N. KUTTNER, C OMM. ON C APITAL M KTS. R EGULATION, THE F EDERAL R ESERVE AS L ENDER OF L AST R ESORT D URING THE P ANIC OF 2008, at 7-8 (2008).
279. Press Release, U.S. Dep't of the Treasury, Treasury Announces Supplementary Financing Program (Sept. 17, 2008), available at http://www.treas.gov/press/releases/hpl144htm.
280. Press Release, Fed. Reserve Bank of N.Y., Statement Regarding Supplementary Financing Program (Sept. 17, 2008), avdlable at http://www.newyorkfed.org/markets/statement-091708.html.
281. Glenn Hubbard, Hal Scott & John Thornton, Op-Ed., The Fed's independence is at risk, F IN. T IMES, Aug. 21, 2009, at 9.
282. Pub. L. No. 109-351, §§201-203,120 Stat. 1966,1968-69 (2006).
283. Press Release, Bd. of Governors of the Fed. Reserve Sys. (Jan. 9, 2009), available at http://www.federalreserve.gov/newsevents/press/other/20090109a.htm.
284. A new statistic is available at Press Release, Bd. of Governors of the Fed. Reserve Sys. (Jan. 12, 2010), available at http://www.federalreserve.gov/ newsevents/press/other/20100112a.htm.
285. See Pub. L. No. 110-343, §128,122 Stat. 3765, 3796 (2008).
286. Id. §129,122 Stat, at 1396-97.
287. The full section, entitled, "Discounts for Individuals, Partnerships and Corporations," provides: In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal Reserve Bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are endorsed or otherwise secured to the satisfaction of the Federal Reserve Bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal Reserve Bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.
288. U.S.C. §343 (2006).
289. Paul Volcker, Former Chairman, Fed. Reserve Sys., Speech at the Economic Club of New York (Apr. 8, 2008).
290. COMM. ON CAPITAL MKTS. REGULATION, R ECOMMENDATIONS FOR R EORGANIZING THE U.S. F INANCIAL R EGULATORY S TRUCTURE 4 (2009);
291. see also KUTTNER, supra note 218, at 12;
292. WILLEM BUITER, CTR. FOR E CON. P OL'Y R ESEARCH, C AN C ENTRAL B ANKS G O B ROKE? 11 (2008).
293. see also BD. OF GOVERNORS OF THE FED. RESERVE SYS., 95 TH A NNUAL R EPORT 428-29 (2008) (noting recent remittances to the Treasury, which included approximately $18.1 billion in 2004, $21.5 billion in 2005, $29.1 billion in 2006, $34.6 billion in 2007, and $31.7 billion in 2008).
294. H.R. 4173, 111th Cong. §1701 (2009) (amending the Federal Reserve Act by inserting §13(c)(3)(A)-(D)). The bill defines "low quality assets" as (A) [Assets] that would be classified as "substandard, " "doubtful," or "loss," or treated as "special mention" or "other transfer risk problems," in a [bank examination or in an internal classification system]. (B) An asset in a nonaccrual status. (C) An asset on which principal or interest payments are more than 30 days past due. (D) An asset whose terms have been renegotiated or compromised due to the deteriorating financial condition of the obligor unless such asset has been performing for at least 6 months since the renegotiation. Id.
295. S ENATE P ROPOSAL, supra note 3, § 1151(6).
296. T REASURY W HITE P APER, supranote 2, at 16.
297. H.R. 4173 §1701 (amending the Federal Reserve Act by inserting §13(c)(1)).
298. Id. (amending the Federal Reserve Act by inserting §13(c)(2)(A)-(B)) .
299. S ENATE P ROPOSAL, supra note 3, §1151(6).
300. H.R. 4173 §1701 (amending the Federal Reserve Act by inserting §13(c)(4)).
301. S ENATE P ROPOSAL, supra note 3, §1151(2)-(5).
302. Id. §1151(6).
303. T REASURY W HITE P APER, supranote 2, at 51-52.
304. Id. at 54
305. H.R. 4173 §1104(b)(1).
306. Id. §1104(g)(1).
307. Id. §1104(a)(2)(A)(i), (a)(4), (e)(2)(A)(i).
308. Id. §1104(e)(7)(B)(v)(II).
309. Id. §1104(e)(7)(D).
310. S ENATE P ROPOSAL, supra note 3, §113.
311. Id. §115(b)(1).
312. Id. §111(f).
313. Jd. §§1154(b), 1155(a).
314. Id. §121(a).
315. Id. §111(b)(1).
316. CCMR P LAN FOR R EGULATORY R EFORM, supra note 1, at 204
317. See T REASURY W HITE P APER, supra note 2, at 4
318. H.R. 4173, 111th Cong. §3107 (2009) (amending the Commodity Exchange Act by inserting §4s(d)), §3204 (amending the Securities Exchange Act inserting § 15F(d));
319. S ENATE P ROPOSAL, supra note 3, §717 (amending the Commodity Exchange Act by inserting §4s(e)(1)).
320. The Treasury, House, and Senate approaches all advocate the creation of a Consumer Financial Protection Agency (CFPA) with broad and sweeping powers to regulate and enforce substantive standards for financial activities involving consumer financial products or services. H.R. 4173 §4201; S ENATE P ROPOSAL, supra note 3, §1021;
321. T REASURY W HITE P APER, supra note 2, at 57-58. The Treasury proposal places a greater emphasis on control by a Board of Directors, whereas the House bill and Senate draft concentrate greater authority in the agency's director. H.R. 4173, §§4201-4202;
322. S ENATE P ROPOSAL, supra note 3, §1011(b);
323. T REASURY W HITE P APER, supra note 2, at 58. The House bill also exempts small financial institutions (insured depository institutions with total assets of $10 billion or less and all insured credit unions with total assets of $1.5 billion or less) from CFPA examination and enforcement. H.R. 4173 §4203(a)(1)(B). The Senate draft, instead, vests the CFPA with the authority to exempt small institutions on a case-by-case basis.
324. S ENATE P ROPOSAL, supra note 3, §1022(b)(3). The current Senate proposal would place the CFPA within the Federal Reserve. SENATE PROPOSAL, supra note 3, §1105(a). This raises a number of important issues. However, the CFPA does not involve systemic risk regulation, and so is outside the scope of this Article.
325. S ENATE P ROPOSAL, supra note 3, §805(c)(2), (5).
326. CCMR P LAN FOR R EGULATORY R EFORM, supra note 1, at 20.
327. Federal Reserve Perspectives on Financial Regulatory Proposds: Hearing Before the H. Comm. on Fin. Servs., 111th Cong. 5-6 (2009) (statement of Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve Sys.);
328. Regulatory Perspectives on the Obama Administration's Financial Regulatory Reform Proposds- Part Two: Hearing Before the H. Comm. on Fin. Servs., 111th Cong. 10-12 (2009) (statement of Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve Sys.).
329. Establishing a Framework for Systemic Risk Regulation: Hearing Before the S. Comm. on Banking, Hous. & Urban Affairs, 111th Cong. 4-6 (2009) (statement of Sheila Bair, Chairman, Fed. Deposit Ins. Corp.).
330. See, e.g., Regulatory Perspectives on the Obama Administration's Financial Regulatory Reform Proposds- Part Two: Hearing Before the H. Comm. on Fin. Servs., 111th Cong. 13-16 (2009) (statement of John E. Bowman, Acting Dir., Office of Thrift Supervision);
331. Press Release, Am Bankers Ass'n, ABA Statement on Proposals to Expand the Role of Federal Reserve (July 9, 2008), available at http://www.aba.com/ Press+Room/070908RoleFederalReserve.htm;
332. Press Release, Sen. Jim Bunntag, Bunning Statement to the Senate Banking Committee on the Federal Reserve Monetary Policy Report (July 15, 2008), available at http://bunntag.senate.gov/public/ index.cfm?FuseAction=NewsCenter. NewsReleases&ContentRecord-id=2753fd62c45e-4a40-5ca8- 66fa83d52a00&Region-id=&Issue-id=.
333. For a discussion of the options banks have when selecting their regulatory structure, see Am. Bankers Ass'n, Charter Choice, Dual Banking & Business Flexibility, http://www.aba.com/Issues/Issues-CharterChoice.htm (last visited Feb. 26, 2010).
334. See Anne Flaherty, House Pushes for Sweeping Audit of the Fed, A SSOCIATED P RESS, Sep. 25, 2009.
335. There is one minor consolidation. Under the House bill all Office of Thrift Supervision powers will be transferred to either the OCC or the FDIC after first consulting with each other. H.R. 4173, 111th Cong. §1208 (2009). The House bill also establishes a Division of Thrift Supervision within the OCC with a thrift charter continuing to exist. Id. §1202(b)(1) (amending the Home Owners' Loan Act by replacing §3(a)).
336. T REASURY W HITE P APER, supranote 2, at 22.
337. CCMR P LAN FOR R EGULATORY R EFORM, supra note 1, at 203-05.
338. STAFF OF S. COMM. ON BANKING, HOUS. & URBAN AFFAIRS, 111 TH CONG., RESTORING AMERICAN FINANCIAL STABILITY ACT OF 2009 § § 311, 322, 331 (2009).
339. Id. § 322.
340. S ENATE P ROPOSAL, supra note 3, § 312.
341. Id. §312(b)(1)(A).
342. One drawback of this approach, however, is that it could encourage banks to manage their asset levels just below the $50 billion threshold.
343. S ENATE P ROPOSAL, supra note 3, § 113(a)(1).
344. See CCMR P LAN FOR R EGULATORY R EFORM, supra note 1, at 203-05.
345. See supra Part IV.
346. See, e.g., Brian F. Madigan, Dir., Div. of Monetary Affairs, Bd. of Governors of the Fed. Reserve Sys., Remarks at the Federal Reserve Bank of Kansas City's Annual Economic Symposium: Bagehot's Dictum in Practice: Formulating and Implementing Policies to Combat the Financial Crisis (Aug. 21, 2009), available at http://www.federalreserve.gov/newsevents/speech/ madigan20090821a.htm.
347. Beate Preuschoff & Andrea Thomas, Bigger Role Eyed for Bundesbank, W ALL S T. J., Oct. 9,2009, at A26.
348. Alistair MacDonald & Laurence Norman, Tory Plan Would Nix U.K. Market Regulator, W ALL ST. J., July 20, 2009, at C4 The next election must be held on or before June 3, 2010. Id.
349. See SCOTT, supra note 8, at 759;
350. Hal S. Scott, Supervision of Internatioal Banking Post-BCCI, 8 G A. S T. U. L. R EV. 487 (1992);
351. Fin. Serv. Auth., History, http:// www.fsa.gov.uk/Pages/About/Who/ History/index.shtml (last visited on Feb. 26, 2010).
352. Sewell Chan, Bank Panel Clears Bill on Overhaul, N.Y. T IMES, Mar. 23, 2010, at B2.