Recent announcements from the SEC, FRB, and global regulators have reinforced earlier FedFin forecasts on the policy initiative key to broker-dealers and asset management within large BHCs and independent firms  The systemic impact of growing high-quality asset shortages is also a critical policy-driver.  Global regulators hope that collateral transformation will cure some of these shortages; however, we have noted serious reservations about the extent to which this is likely in a series of client reports in the SYSTEMIC and LIQUIDITY series.

Here, we update you on recent developments and provide short updates on next steps. Confirming our previous analyses of the cumulative impact of big-bank capital and liquidity rules, an expert group convened by the BIS’s Committee on Payment and Market Infrastructure has concluded that reduced market-making by large banks is creating dangerous risk concentrations and, as a result, increasing potential systemic dependence on large asset managers.  The BIS  report (detailed in an alert on November 26) calls for new central-bank liquidity facilities focused on securities financing, the “market-maker of last resort” facilities on which some at the FRB are working despite growing pressure from Congress to curtail the central-bank’s backstops. 

As previously noted, any extension of FRB support – even if only conceptually – to non-banks – poses significant strategic challenges not only to the FRB, but also to the large banks facing tough pressure to handle even acute stress without resort to the discount window or other FRB support facilities.  To the extent the market believes that U.S. G-SIBs will be forced to fail via bankruptcy and other SIFIs will still be rescued, significant market asymmetries will result.

The BIS tries to offset its suggestion for asset-management access to central banks with a call for large firms to come under total loss-absorption capacity (TLAC) standards like those just proposed by the FSB for the world’s largest banks (see Client Report TLAC).  However, global efforts to name systemic asset managers are foundering and the prospects for mandating TLAC for them are formidable.  Because a key concern here is MMF resilience, the SEC has put tougher MMF liquidity-risk management standards and asset-manager stress tests on its 2015 action list.  As noted in last week’s alert, we expect each of these will be hard sells to skeptical SEC commissioners, with the third plank in the Commission’s work plan – broker-dealer leverage standards – an even tougher proposal to move across a finish line blocked by strong industry opposition, concerns about the perverse impact of leverage capital, and fundamental disagreements about the SEC’s regulatory focus.

For further information on these developments and the referenced reports, please e-mail us at or call 202-589-0880.