Chapter 2 Regulatory and Legal Environment

Transcription

1 Chapter 2 Regulatory and Legal Environment

2 Tips, Tools and Tricks Read, read, read Flashcards Treasury Learning System Your own Online Module Tests, Post tests, Calculations Study Groups LinkedIn City-wide Audio files This class Your own recordings of the chapters Formula dump 2

3 Chapter 2: Regulatory and Legal Environment Outline: General Regulatory Environment Primary Regulators and Standard Setters of Global Financial Markets US Legal and Regulatory Environment Bankruptcy (Insolvency) 3

4 General Types of FI Regulations Monitor and manage overall safety and soundness of banking system Set and implement monetary policy Determine guidelines for chartering banks and other depository FIs Allocate credit toward sectors of economy and protect consumers Protect investors purchasing securities through FIs 4

5 Central Banks Monetary Policy Currency Issuance Government Services Fed Peoples Bank of China Supervision and Regulation ECB Bank of England Depository Institution Services Central Banks 5

6 Financial Stability Board (FSB) Goals Maintain financial stability Promote transparency Implement international financial standards Conduct peer reviews 6

7 Bank for International Settlements BIS BIS Committees BCBS (Bank Supervision) Basel III (2011 through 2018) World War I finance issues (1930) Central bank cooperation Basel meetings Financial and economic research Services to central banks Agent/trustee GHOS: governing body CGFS: policy and systemic threat response CPSS: payment and securities settlement systems Herstatt risk (1974) Reduce systemic risk Basel I (1988): Credit risk Basel II (2004): Operational risk -- Minimum capital -- Supervisory review -- Disclosure Stress testing Market liquidity risk Capital adequacy Absorb shocks Risk management and governance Transparency Bank-level and system-wide 7

8 European Payments Council and SEPA EPC Support SEPA Cooperative common positions for payment services Payments coordination and decision making SEPA schemes and frameworks Integrate existing credit transfer/direct debit SEPA for cards Incentivize electronic payments For electronic euro payments SEPA concepts Credit and debit payment schemes Payment card framework Minimum standards and pricing 8

9 Sample Question A goal of the Single Euro Payments Area (SEPA) is to incentivize what? A. Paying with the euro in cash transactions B. Convergence of securities regulations C. Use of electronic payment instruments D. Standardization of deposit insurance across SEPA countries C. The SEPA program seeks to incentivize increased use of electronic payment instruments, while reducing the cost of wholesale cash distribution. 9

10 Primary Regulators and Standard Setters of Global Financial Markets IADI IOSCO FATF IAIS Deposit insurance systems 70 deposit insurers from 69 jurisdictions International standard setter for securities markets Members regulate more than 95% of world s securities markets 30+ countries National and international policies to combat money laundering and terrorist financing Placement Insurance supervisors 190 jurisdictions in nearly 140 countries Efficient, fair, safe and stable insurance markets Layering Integration 10

11 Sample Question Which of the following is true of the International Association of Insurance Supervisors (IAIS)? A. It is an intergovernmental group devoted to development and promotion of national and international insurance standards B. Its primary objective is to encourage members international and domestic cooperation to ensure efficient, fair, safe and stable insurance markets. C. It serves as a counterparty, agent or trustee in connection with international insurance transactions. D. It provides comprehensive technical assistance to its members, in particular those that regulate emerging insurance markets. 11

12 US Legal and Regulatory Environment Glass-Steagall Act of 1933 until Gramm-Leach-Bliley Act of 1999 Dodd-Frank Act of 2010 Response to near failure of US banking system in 2009 recession Derivatives transparency and accountability: Closes regulatory gaps Requires central clearing and exchange trading Requires market transparency Adds financial safeguards Sets higher standards of conduct 12

13 Regulatory Agencies Dual banking federal supervision: OCC Office of the Comptroller of the Currency FDIC Federal Deposit Insurance Corporation FSOC Financial Stability Oversight Council Monitor specific depository FIs or financial services: CFPB Consumer Financial Protection Bureau OFAC Office of Foreign Assets Control FinCEN (US FIU) Financial Crimes Enforcement Network NCUA National Credit Union Administration State banking boards and commissions The Secret Service DOJ Department of Justice Regulators focused on specific sectors: SEC Securities and Exchange Commission CFTC Commodity Futures Trading Commission FINRA Financial Industry Regulatory Authority 13

14 Sample Question Which of the following performs market regulation for the NASDAQ Stock Market and the International Securities Exchange? A. Financial Industry Regulatory Authority (FINRA) B. Federal Trace Commission (FTC) C. Partnership of the SEC and CRTC D. International Organization of Securities Commissions (IOSCO) 14

15 Securities and Exchange Commission Registers public offerings of debt and equity Sets financial disclosure standards for corporations that sell securities to the public Requires companies with publicly owned securities to file quarterly and annual financial statements Regulates mutual funds and investment advisors Monitors insider trading 15

16 Federal Reserve Federal Reserve Act Foundation for current banking system All banks with national charter from OCC to become Reserve banks National check collection and settlement system Monetary Policy Supervision and Regulation Government Services Depository Institution Services Regulation D Regulation J Implements Federal Reserve Act of 1913 Uniform reserve requirements on all depository institutions with reserve levels by deposit type Implements check collection and settlement provision of Federal Reserve Act (1913) Procedures, duties and responsibilities 16

17 Sample Question All of the following are functions of the Federal Reserve System EXCEPT A. Examining national banks for loan quality B. Clearing of checks between depository institutions C. Purchasing and selling of U.S. government securities D. Holding collateral for government agencies A. The OCC examines national banks and federal thrifts for asset (loan) quality, capital adequacy, management and other key regulatory issues. 17

18 Glass-Steagall Glass-Steagall Act 1933 Mostly repealed except deposit insurance Historically: Commercial banks can t underwrite Securities firms can t take deposits Interest rate ceilings Regulation Q No paying interest on corporate DDAs Repealed by Dodd-Frank Act 18

19 Sample Question Which Federal Reserve regulation can be used to control the supply of money by changing the level of reserves required? A. Regulation E B. Regulation J C. Regulation Q D. Regulation D 19

20 Anti-tying in Bank Holding Company Act 1970 Prohibits tying in financial services Extension of credit not conditional to obtaining other bank services Exceptions for traditional bank product 20

21 Gramm-Leach-Bliley Act (1999) Eliminated many Glass-Steagall Act provisions (e.g., banking, insurance and securities barriers) Permits the creation of financial holding companies (FHCs) Establishes the Fed as the primary regulator of FHCs Allows easier entry by foreign banks Key consumer protections Protects nonpublic personal information 21

22 Payment Systems & Instruments Legislation EFTA (1978) Customer rights, responsibilities and liability limits for non-wire EFTs DIDMCA (1980) Deposit-taking Fed reserves Discount window Reduce/price float E-SIGN (2000) Digital signatures legal status Check 21 (2003) Substitute of image in clearing process Payment system efficiency Regulation E Implements EFTA (1978) Rights, responsibilities of consumer EFT parties Consumer protections: ATM, ACH, credit cards 22

23 Bank Secrecy/Money Laundering Control BSA (1970), MLCA (1986) Must report suspicious financial transactions FI defined broadly Crime to structure transactions to avoid reporting KYC, parties to large-value transfers, referrals 23

24 USA PATRIOT Act (2001) Non-bank FI obligations Foreign banks in US subject to US jurisdiction US banks: no foreign shell bank correspondent accounts US credit card operators cannot authorize foreign banks to issue or accept US credit cards without steps to prevent terrorist use Requires due diligence 24

25 Sarbanes-Oxley Act (SOX) (2002) Improve disclosure and financial reporting SEC rule changes: Code of ethics for senior management and waivers Audit committee financial expert? Financial reporting internal controls Audit committees preapprove audit/non-audit services Accounting/preferable alternatives briefing Regulation G: Reconcile pro-forma information to financials Form 8-K earnings releases Material OBSA in MD&A 25

26 Federal Reserve Regulations Regulation Y Regulation Z Regulation BB Regulation CC Implements Bank Holding Companies and Change in Bank Control Acts, e.g., anti-tying Protects vs. sudden credit card rate hikes Prohibits issuing credit card to < age 21 Consent for over-limit fees Limits high fees Two-cycle billing ban No allocating payments to maximize interest Implements Community Reinvestment Act Rules to speed check collection and return Endorsement standards for deposit, clearing Same return procedures on checks and PTDs 26

27 Investments and Securities Regulations Regulation FD: If MNPI to certain entities, then disclose to public SEC Rule 2a7, MMMFs and NAV Reserve Primary Fund broke the buck Liquidity and asset quality requirements Shorter average time to maturity Internet accessible asset reporting Proposed floating NAV 27

28 The Uniform Commercial Code (UCC) Article 3 Negotiable Instruments Avoids inadvertent accord and satisfaction Payee must return within 90 days Unauthorized signatures: Properly payable checks Liability for check issuance situations Article 4 Bank Deposits, Collections Deposit and collection parties Customer-bank relationship Company s duty to examine bank statements Imperative to reconcile accounts accurately, timely 28

29 The Uniform Commercial Code (UCC) Article 4A Funds Transfers Security procedures available to customer PINs Callbacks Encryption Message authentication Consequential damages: No liability beyond actual loss Payment orders: liable for interest losses or incidental expenses Article 5 Letters of Credit (L/Cs) Defines L/C, documentary draft or documentary demand for payment Defines issuer, applicant, beneficiary, advising and confirming banks Article 9 Secured Transactions UCC-1 Financing Statement listing collateral 29

30 Sample Question Which of the following actions would help a wire transfer comply with Uniform Commercial Code Article 4A? A. Notifying the bank within 24 hours of any unauthorized ACH debit transactions B. Limiting the wire transfer pricing changes to the sending institution only C. Requiring the response of the receiving financial institution for prenotes D. Providing message authentication services for electronic transfers D. A bank must make security procedures available to the customer. Further, the bank and the customer must agree that the procedures are commercially reasonable for verifying payment. Some common security measures include the use of personal identification numbers (PINs), callbacks, encryption and message authentication. 30

31 Tax Considerations Unitary taxes Foreign tax credits Capital tax Asset tax Turnover tax Withholding tax Sales and use taxes Value-added tax 31

32 Bankruptcy (Insolvency) Unable to meet scheduled debt payments now or in near future Management and board Creditor forced Critical issues: Temporary cash flow or permanent trend? Restructuring and impact on value Worth more if liquidated? Formal or informal? Who will be in charge? Bankruptcy type? 32

33 US Bankruptcy Legislation Chapter 11 reorganization Unanimous consent procedure Cram-down procedure Chapter 7 liquidation Safeguards against owner withdrawal of assets Equitable distribution of assets among creditors Insolvent debtors can discharge all obligations and start over Formal bankruptcy Freefall Pre-arranged Pre-packaged Informal bankruptcy 33

34 Chapter 7 bankruptcy priority of claims 1. Specific property pledged (e.g., lien) 2. Trustee s costs 3. Pre-trustee involuntary liquidation expenses 4. Wages earned three months prior to filing 5. Unpaid benefit contributions owed six months prior 6. Unsecured claims for customer deposits 7. Taxes due 8. Unfunded pension plan liabilities up to 30% of book value of common/preferred equity 9. General unsecured creditors 10. Preferred stockholders (paid up to par value) 11. Common stockholders (receive remaining funds) 34

35 Questions? 35