12 December 2009

House approves new rules on US Financial System

The Wall Street Reform and Consumer Protection Act will create a Financial Stability Oversight Council for systemic risks, establish reforms for the OTC Derivative Markets, introduce a 5% retention rate and address the too-big-to-fail issue by introducing a Systemic Dissolution Fund.

 

The US House of Representatives approved new legislation to modernize America’s financial rules in response to the worst economic crisis since the Great Depression.

 

The Wall Street Reform and Consumer Protection Act creates a Financial Stability Oversight Council for systemic risks, establishes reforms for the OTC Derivative Markets, introduces a 5% retention rate and addresses the too-big-to-fail issue by introducing a Systemic Dissolution Fund.

 

The legislation requires clearing and trading on exchanges or electronic platforms for all standardized transactions between dealers and other large market participants.

 

The legislation divides jurisdiction over swaps between the SEC, which will oversee activity in swaps that are based on securities like equity and credit-default swaps. The CFTC is responsible for all other swaps—including those based on interest rates and currencies.

 

The legislation also creates a Financial Stability Oversight Council which will monitor the marketplace to identify potential threats to the stability of the financial system.

The Federal Reserve will serve as the Council's agent in regulating systemically risky firms on a consolidated basis and systemically risky activities wherever they occur, ensuring broad accountability for such regulation

 

It removes the Gramm-Leach-Bliley Act restraints on the consolidated supervision of large financial companies and provides specific authority to the Fed and other federal financial agencies to regulate for financial stability purposes and quickly address potential problems.

 

It also provides enhanced regulation for non-banks and closes loopholes by placing additional safeguards on industrial loan corporations and other non-bank depository institutions, bringing them under a consolidated supervisory framework.

 

It will also introduce a 5% retention rate. The SEC will require creditors to retain at least 5 per cent of the credit risk associated with any loans that are transferred, sold or securitized.

 

With regard to the too-big-to-fail issue, the new legislation foresees an orderly process for dismantling large, failing financial institutions. A Systemic Dissolution Fund can be used to help wind down failing financial institutions, but not to preserve them. The Fund will be pre-funded by assessments on financial companies with more than $50 billion in assets and by hedge funds with more than $10 billion in assets. This authority sunsets on December 31, 2013, unless extended by Congress.

 

The Senate has now to agree before the law will be enacted.

 

For further detailed information see the House website

 

© US House Financial Services Committee