By Jack Doran
NEW YORK (IFR) – The US Treasury on Friday unveiled an array of sweeping reforms of capital markets in the US designed to boost market access and investment opportunities.
The proposals, which form part of President Donald Trump’s plan to spur economic growth and reduce regulation, include efforts to roll back current regulations, many of which were imposed after the financial crisis of 2008.
Among the intended beneficiaries of the Treasury Department’s plans are structured finance and the corporate bond and equities markets.
“The US has experienced slow economic growth for far too long,” said Treasury Secretary Steven Mnuchin. “By streamlining the regulatory system, we can make the US capital markets a true source of economic growth which will harness American ingenuity and allow small businesses to grow.”
The 200-plus-page report contained recommendations for a broad array of asset classes.
The report makes clear that the Treasury is intent on rolling back or amending a number of rules imposed under the Dodd-Frank Act – legislation introduced in the wake of the financial crisis intended to make banks safer.
Dodd-Frank includes the Volcker Rule, which prevents certain banks from doing proprietary trading and limits investment in certain hedge funds and private equity funds. The rule has been a particular sore point among a number of dealers.
In the report, the Treasury said liquidity in the corporate bond market is hampered by the rule.
“The Volcker Rule’s market-making exception has not been implemented effectively, and firms are hesitant to make markets, especially in illiquid securities where predicting near-term customer demand is difficult.”
“Although findings are still preliminary, some research has found that the Volcker Rule has reduced market-making activity and liquidity in times of stress,” the report said.
The Treasury reiterated its view that banks with US$10bn or less in total consolidated assets should be entirely exempt from the Volcker Rule. And banks with over US$10bn in assets should not be subject to the rule’s proprietary trading prohibition if they do not have substantial trading activity.
One key change proposed by the report is eliminating the presumption that financial positions held for fewer than 60 days constitute proprietary trading.
The report’s proposals may also prove a boon for the securitization market – including the private-label RMBS market, a shadow of its pre-crisis size.
The Treasury reiterated prior recommendations that would do away with (or create exemptions to) risk retention for certain structured finance deals – including CLOs and RMBS.
The report said that risk retention should not be “statutorily eliminated but should instead be right-sized”.
Loan level disclosure requirements under REG AB II – rules that many issuers have struggled to meet – were also touched on in the report.
“The Treasury wants to rationalize and reduce the data,” said Paul Forrester, a partner at law firm Mayer Brown.
“Banks never understood why regulators mandated this in the first place. It really feels like, finally, someone is listening to all the complaints about over-regulation,” said Forrester.
Part of the Dodd-Frank Act, risk-retention rules took effect in December 2016 and require managers to hold 5% of their fund.
The Loan Syndications and Trading Association has championed the merits of a “Qualified CLO”, which would require a manager to hold 5% of the fund’s most junior slice, the equity, and meet a number of tests in areas including diversification and structural protections, to comply with risk-retention rules.
Among a raft of suggested changes for the equities market, the Treasury highlighted the benefits of the 2012 JOBS Act to the equity market.
“The costs of going public have not gone down, even with the JOBS Act,” said Anna Pinedo, a partner at Morrison & Foerster. “That remains a concern. Once companies go public, obviously they’re subject to intensive scrutiny, and they’re subject to litigation risk.”
The Treasury recommended expanding the act for companies with revenue exceeding US$1bn.
On class action lawsuits, the Treasury highlighted threats to public companies, but only recommends that the SEC “investigate means to reduce costs of securities litigation for issuers”.
The Treasury also proposed scaling back the part of the Dodd-Frank Act that “imposed requirements to disclose information that is not material to a reasonable investor for making investment decisions”.
Market reactions to the recommendations were mostly muted.
Oliver Ireland, a partner at Morrison Foerster and formerly associate general counsel at the Federal Reserve, said a lot of the report’s proposals seemed less specific than in the previous report on banking reform.
“Some are quite specific and some are very general. If we are going to simplify the regulatory structure we are going to have to get to detail,” he said.
Mayer Brown’s Forrester added, however: “This impacts everyone, potentially.”
“Some of the recommendations are pretty far-reaching and could have the potential to have a huge economic impact.”