SIFMA Focuses on Prudential Regulations

Prudential regulations can have a very severe and profound impact on the trading books or capital markets activities of bank affiliated broker-dealers, according to Kenneth E. Bentsen, Jr., President and CEO, SIFMA.

Kenneth E. Bentsen

Speaking at the State of the Industry Briefing, a virtual year-end briefing on the outlook for the markets, the economy and the industry, Bentsen said that the Prudential regulators are expected to put out “the Basel III end game” and this would include the Fundamental Review of the Trading Book (FRTB) and the Credit Valuation Adjustment (CVA).

“These are really the final leg of the post financial crisis capital and liquidity rules applying to banking institutions,” he said.

According to SIFMA, Prudential regulation requires financial firms to control risks, hold adequate capital and liquidity, and have in place workable recovery and resolution plans.

It is essential that the regulatory regime accounts for the vital role the capital markets play in providing credit and financing the real economy, particularly as regulators consider the implementation of elements of the Basel III capital proposal. 

It’s vital that those rules should be implemented in a manner that does not overly penalize banks’ capital markets activities, which in turn could reduce liquidity in vital corporate and other funding markets, thereby hurting growth in the real economy, according to SIFMA.

Bentsen said that SIFMA expects to engage with the Prudential regulators when they put that proposal out in the first quarter of 2023.

“Our focus there will be to hopefully convince the regulators that they should be careful not to be overly punitive with respect to Trading Book activities,” he stressed. 

According to SIFMA, U.S. prudential rules generally impose significantly higher capital and liquidity costs on banking entities with significant capital markets operations. 

“It is thus crucial to align and allow for mutual recognition, to the extent possible, the capital and liquidity standards set out by the U.S. banking regulators and the market regulators,” according to SIFMA.

In the equity market structure realm, all market participants and regulators over the years, including SIFMA have called for various changes to Reg NMS. 

“We are concerned with some of the ideas that are being discussed, which could have severe negative consequences for investors who really are enjoying the best ease of access, the lowest cost of trading, the best execution than they’ve ever had, particularly retail investors,” commented Bentsen.

“We believe the SEC needs to be extremely careful in its approach here to not put forth a solution in search of a problem that could really have a negative consequence for retail investors in particular,” he added.

Another area of focus for SIFMA, according to Bentsen, involves digital assets.  

This is something that SIFMA has been looking at for some time starting with the technology around things like distributed ledger and blockchain, how it can be used in the traditional securities markets through the digitization of securities, he said.

In addition, SIFMA has been engaged in the various requests for information by the US government with respect to the regulatory oversight of digital assets, including things such as stable coins and crypto currencies, Bentsen said.

He added that at the international level SIFMA has been engaged on the Basel consultation on capital treatment for banks’ exposure to crypto assets, as well as the SEC Staff Accounting Bulletin 121 with respect to balance sheet treatment, custody and digital assets.

“We have an existing framework which works quite well, that we think can be applied perhaps with some appropriate tailoring to these new types of assets,” he said. 

Bentsen added that “number one on that is the need to put investment protection at the forefront.”

In addition, SIFMA is setting a target date of transition from T+2 to T+1 settlement cycle.

Bentsen said that SIFMA thinks the appropriate target date of transition is Labor Day 2024. 

“We think that gives ample time for the industry to conduct testing and we know from our experience in 2017 that there are a lot of different parts to this that need to be tested to avoid unnecessary market disruption,” he said.

“We’re eager for the SEC to act and give clarity with respect to that,” he commented.