Will the Fed regulate US FX Brokers?

Bush seeks financial regulation overhaul

By MARTIN CRUTSINGER, AP Economics



WASHINGTON - The Bush administration is proposing a sweeping overhaul of the way the government regulates the nation's financial services industry from banks and securities firms to mortgage brokers and insurance companies.

http://us.bc.yahoo.com/b?P=mY47.EWTc...%2fB%3d5230990
The plan would give major new powers to the Federal Reserve, according to a 22-page executive summary obtained by The Associated Press.
The Fed would be given broad authority to oversee financial market stability. That would include new powers to examine the books of any institution deemed to represent a potential threat to the proper functioning of the overall financial system.
The proposal, which will be outlined Monday in a speech by Treasury Secretary Henry Paulson, is certain to set off heated debates within different sectors of the financial services industry and in Congress, where some Democrats are likely to complain that the proposal does not go far enough to crack down on abuses.


The administration divided its recommendations into short-term goals that could be adopted quickly, intermediate recommendations and an "optimal" regulatory framework, which contains a radical restructuring of how the government supervises banks and other financial institutions.
The recommendations are the product of a yearlong review that was begun in an effort to modernize the government's regulatory structure so that the country's financial services industries could better compete in a fast-changing global economy.


The plan also seeks to address problems that have been brought to light in recent months since a severe credit crisis began roiling financial markets last August.
That crisis has already claimed as its biggest victim Bear Stearns, the nation's fifth-largest investment bank, which came to the brink of collapse before a government-arranged purchase by JP Morgan Chase & Co.


"I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years," Paulson will say in the remarks he will deliver on Monday.


But the plan does seek to address problems highlighted by the current crisis in which the Fed in an unprecedented move has begun making direct loans to securities firms in an effort to shore up a system badly shaken by billions of dollars of losses stemming from sour mortgage loans.
The proposal would allow the Fed, in its new role as "market stability regulator," to dispatch examiners to check the books not just of commercial banks but of all segments of the financial services industry.


The administration proposal would

also consolidate the current scheme of bank regulation by shutting down the Office of Thrift Supervision and transferring its functions to the Office of the Comptroller of the Currency, which regulates nationally chartered banks.


The plan recommends that the Securities and Exchange Commission, which regulates stock trading, be merged with the Commodity Futures Trading Commission, which regulates futures trades for oil, grains and various other commodities.


The plan would create a national regulator for the insurance industry, which is now largely governed by the states, and would create a Mortgage Origination Commission to try to address the abuses exposed in the current tidal wave of mortgage defaults.


The role Federal Reserve Chairman Ben Bernanke and his colleagues have been playing to shore up the financial system would be formalized in the administration plan by giving Fed officials greater power to detect where threats might be lurking in the system.


The proposal is certain to generate intense scrutiny in Congress and within the financial services industry, where past efforts to change how regulation is handled have met with fierce resistance.
Many Democrats in Congress are already pushing tougher proposals that would impose much stricter regulation in an effort to crack down on abuses exposed by the current credit crisis.


Sen. Charles Schumer, D-N.Y., said he believed Paulson's plan offered some valid suggestions.
"In broad outlines, we agree with large parts of Secretary Paulson's plan," Schumer, chairman of the Joint Economic Committee, said in a statement. "He is on the money when he calls for a more unified regulatory structure, although we would prefer a single regulator to the three he proposes."
Under Paulson's approach, the long-term goal would be to designate the Fed as market stability regulator and to have a financial regulator who would focus on financial institutions that operate with government guarantees such as providing deposit insurance.


The administration plan, which was first reported by The New York Times on its Web site Friday night, also proposes a business conduct regulator who would be in charge of overseeing consumer protection issues.


The initial reaction from the securities industry was also positive.


"Treasury has delivered a thoughtful and sweeping plan which should provoke intense discussion, debate and potential legislative changes," said Tim Ryan, president of the Securities Industry and Financial Markets Association.


"Our present regulatory framework was born of Depression-era events and is not well suited for today's environment where billions of dollars race across the globe with the click of a mouse," Ryan said in a statement.

And how do forex brokers represent "a potential threat to the proper functioning of the overall financial system."?

The value of the US dollar, maybe? Who knows?

You think the big money that places billions of dollars in orders cares if Oanda or any other retail broker or ECN goes bankrupt?

I have no idea...

I was just posting the article to see if it might relate to us, as FX traders. I'm not too sure what to make of it.

LOL. It's not about being a threat, it's about money. These brokers aren't in the money loop, they don't pay fees or license dues to any federal agency, they don't report taxes, and all their accounting (leverage, spending, etc) happens behind a curtain.

I'm quite sure, sooner or later, they'll change that. They'll regulate FX brokers to add "oversight" ... not that the "oversight" will be effective at all (did SEC oversight help prevent the mortgage blow-out? no), but it will make politicians feel better and give them a way to suck more money out of us all while forcing us to dance thru a growing set of useless hoops just for their amusement.

All in all I expect the following will occur sooner or later in some form:
1. Taxes will be more formalized
2. Leverage will regulated more tightly
3. We'll have reporting rules shoved onto us
4. We'll have higher minimum financial requirements to trade
5. Our brokers will be required to get a license
6. Our brokers will have a lot more rules forced onto them, some may be good... most will just be ineffective ways to suck time and money.
7. The barrier to entry will grow, smaller players will have a harder time getting started.

Personally I hope the CFTC and the SEC don't merge. The SEC is so bloated and useless they've become just another police body. We don't need the CFTC to go the same way.

This is asinine. When will they learn? It's not about MORE regulation. It's about BETTER regulation.

Giving them too much power will be a hindrance to our financial wellfare and overall free-market system.

People seem to be divided into 2 categories: the Fed shouldn't have intervened the way it did and the Fed should've. Personally, I'm wondering what happened to the "time" component of all this. I think there should be a 3rd category of opinion: the Fed didn't act soon enough and efficiently enough.

If we give them more power, they'll never learn from their mistakes. What we need is an overhaul of the regulatory agencies by strengthening the power they do have, not by giving them more powers.

This is a pretty good post. I hope you're wrong.

I read another article somewhere that the Fed's quest for more power and control over all financial markets wont pass through Congress, because there are way too many vested interest there in the status quo. I agree. Apparently, this has been tried before.

The FED has tried this before and Pres Bush does not approve of more regulation so this is not likely to pass. Paulson will sweet talk Wall Street today and after donating 33B/day to Wall Street banks his words might strike a chord. A fraudulent, deceitful chord but a chord nonetheless on Wall Street. I'm seeing USDJPY and ES position themselves long now ahead of the speech let's see what we get today. Predicting is for fun only. Trading the real trendline breaks as they happen is where the money is made.

Update:


Paulson Proposes U.S. Regulatory Overhaul, Broader Fed Role
By Jesse Westbrook

March 31 (Bloomberg) -- Treasury Secretary Henry Paulson proposed the broadest overhaul of U.S. financial regulation since the Great Depression, saying the system for overseeing American capitalism needs to be better prepared for ``inevitable market disruptions.''

``Our major financial services companies are becoming larger, more complex and more difficult to manage,'' Paulson said in the text of remarks at the Treasury's headquarters in Washington.

Paulson's 218-page ``Blueprint for Regulatory Reform,'' commissioned two months before credit markets seized up in August, said more rules aren't ``the answer'' to the current period of turmoil. The former chairman of Goldman Sachs Group Inc. said the structure of regulating banks, securities firms and insurance companies is outmoded, and the Federal Reserve should expand its oversight of financial services beyond banks.

``We should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change, one that will allow us to more effectively deal with inevitable market disruptions, one that will better protect investors and consumers,'' Paulson said.

The Fed, which earlier this month engineered JPMorgan Chase & Co.'s purchase of Bear Stearns Cos. and became lender of last resort to the biggest bond dealers, will oversee ``market stability,'' under proposals Paulson unveiled. The Securities and Exchange Commission, traditionally the main regulator of Wall Street firms, will be merged with the Commodity Futures Trading Commission.

Most of Paulson's proposals will require congressional approval.

New Fed Authority

The Treasury recommended that the Fed share authority over banks, securities firms and insurers in monitoring corporate disclosures, writing rules and stepping in to prevent economic crisis.

``To do its job as the market stability regulator, the Fed would have to be able to evaluate the capital, liquidity and margin practices across the financial system and their potential impact on overall financial stability,'' Paulson said.

The plan also suggests a distinction be made between the Fed's ``normal'' lender-of-last-resort discount window to help banks meet short-term funding needs and ``market stability'' lending to help stave off funding shortages and panics. In that function, loans could be extended to federally chartered insurers and financial institutions.

``The Fed must have the necessary information to perform its role as it temporarily provides liquidity to non-banks,'' Paulson said. ``But it would be premature to assume these institutions should have permanent access to the Fed's discount window and permanent supervision by the Fed.''

No `Comprehensive Design'

Changes to the U.S. regulatory system, parts of which date back to the Civil War, have been proposed in the past, only to be thwarted in Congress and frustrated by industry opposition. The Presidential election will make it harder for the Bush administration to push through changes in its final year, said Bill Isaac, who was chairman of the Federal Deposit Insurance Corp. between 1981 and 1985.

``It's a lame duck administration, so it automatically means they have less credibility than they would have if they were in their first year,'' said Isaac, who now heads The Secura Group, a financial consulting firm in Vienna, Virginia. ``And the known devil is better than the unknown devil in the minds of those who are regulated.''

Reich Bets on Survival

John Reich, director of the Office of Thrift Supervision, said he's skeptical that the combination of his agency with the Office of Comptroller of the Currency, as proposed by Paulson, will be easily achieved.

``Expect to see news stories and renewed questions about what the future will hold,'' Reich wrote in letter to employees on March 28. ``The 20th anniversary of the OTS is next year. We can all expect -- despite predictions over the years to the contrary -- to be celebrating it.''

The OTS, a Treasury division created in 1989 after the savings-and-loan crisis, oversees lenders including Calabasas, California-based Countrywide Financial Corp., the biggest U.S. mortgage lender, and Seattle-based Washington Mutual Inc., the largest U.S. savings and loan.

``The bulk of these regulatory responses made sense at the time they were created, but as we look at today's financial markets, the lack of a comprehensive design in clear,'' Paulson said. He added that ``with few exceptions, the recommendations in this blueprint should not and will not be implemented until after the present market difficulties are past.''

Political Obstacles

In his letter, Reich outlined obstacles to Paulson's plan, saying congressional debate and hearings could stretch into next year, when a new Congress and a new president ``may well have their own priorities and agendas.''

A dozen similar efforts by presidents, legislators and others over the last 60 years never ``became reality,'' Reich wrote. His office distributed the letter to reporters on the weekend.

He also said there was a lack of industry support for restructuring the regulatory system, including opposition from the American Bankers Association to merging the OTS with another agency.

Treasury's proposal would ``create a more coherent supervisory scheme'' by ending ``some of the inconsistencies arising from today's patchwork system,'' Lou Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm, said in a report.

`Moral Hazard'

Still, expanding the Fed's role to stabilize markets would exacerbate the ``moral hazard problems'' stemming from the central bank's decision to lend money to investment banks after the near-collapse of Bear Stearns, said Crandall, who used to work at the New York Fed.

So-called moral hazard is the notion that bailouts encourage financial companies to take risk because they assume the government will always come to the rescue.

``The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability,'' Paulson said.

``The Fed will collect information from commercial banks, investment banks, insurance companies, hedge funds, commodity-pool operators,'' he added. Rather than focus on the health of the particular organization, it will focus on whether a firm's or industry's practices threaten overall financial stability.

To contact the reporter on this story: Jesse Westbrook in Washington at [email protected].

Actually, Bush is behind it.