24 02, 2023

FedFin on: Custody Reform

2023-02-24T16:53:29-05:00February 24th, 2023|The Vault|

Making full use of powers granted in the 2010 Dodd-Frank Act, the SEC is proposing a wholesale rewrite of the rules dictating how investment advisers must place assets in custody and which institutions are considered qualified for this purpose. Although the proposal was sparked first by controversies surrounding custody for cryptoassets and then by significant investment losses, the NPR reaches most assets held in the direct or indirect possession of investment advisers or to which the adviser may gain possession, also redefining qualified custodians to exclude not only most crypto platforms, but also foreign firms and other entities the Commission believes do not ensure sufficient safeguards protecting investor assets in the event of the adviser’s malfeasance, insolvency, or operational failure….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

7 03, 2022

Karen Petrou: Why Armies Now March on Their Wallets

2023-04-04T12:29:27-04:00March 7th, 2022|The Vault|

Napoleon famously said that armies march on their stomachs.  Now, it’s clear that armies also march on their wallets.

The dollar’s blitzkrieg triumph isn’t due to any love of the greenback — even America’s closest allies have long hoped to counterbalance US. economic dominance with rival payment systems able to operate unscathed regardless of U.S. sanctions.  However, the EU, U.K., and Japan have never gotten much past dreaming about payment-system challenges because the embedded dollar-based system has become essentially friction- and risk-free.  That’s hard to beat.

China might still have a shot at a yuan-based substitute, but it would have to ensure liquidity (essentially impossible when a currency isn’t freely convertible) as well as political neutrality.  China’s decision suddenly to mount de facto nationalization of what was once a thriving, privately-owned digital-commerce sector will at the least give pause to those whose funds would move through a Chinese-dominated system.

Any nation that wants to replace the dollar also has to have sovereign obligations readily understood to be a safe haven under acute stress that are issued in amounts sufficient to absorb extreme shock.  China and the EU has no single issuer of sovereign bonds in quantity and quality sufficient to substitute for Treasury obligations.  Most market participants think China is more likely to be the cause of a shock than ever to serve as a shock absorber, ruling out its sovereign debt even if it grows large enough to mount a challenge to the U.S. Treasury.

And, finally, there’s the …

28 02, 2022

Karen Petrou: What’s to Come as SWIFT Sanctions Take Hold

2023-04-04T14:58:10-04:00February 28th, 2022|The Vault|

A few years back, I gave a speech at SWIFT’s annual meeting knowing little of what it did beyond the speakers I was invited to join.  While the meeting was in a cavernous conference center, the off-hours discussions in magnificent chateaus were small, serious, and — at least for me — insightful as to the awesome power of a seemingly-simple “messaging system”.  Now, of course, the world knows why Swift matters– indeed, Vladimir Putin is taking this so seriously that we’re all reminded of the literal meaning of the “nuclear option.” Putin is right –America’s “soft” economic power gives it a weapon of formidable might.

Will it backfire?  One of the questions I’ve repeatedly gotten over the weekend is whether U.S. banks can withstand market disruptions now or under even greater stress if sanctions expand to still more Russian banks and thereafter also to those still doing business with them.  In short, there is no doubt that banks in the U.S. will withstand near-term stress and even less-resilient ones in the EU and Japan will do the same.

The reason for this is the demonstrable certainty that central banks will intervene to ensure dollar liquidity across the world and financial-market liquidity wherever it seems threatened.  Unlike 2008 and 2020 when Fed windows were opened too wide and too long, this geopolitical crisis is of no financial firm or central bank’s making. What all this new money might do to already-bloated financial markets is yet to be known, but central banks …

21 01, 2022

Karen Petrou: Few Financial Fall-Out Shelters If Russia Invades Ukraine

2023-04-24T11:51:21-04:00January 21st, 2022|The Vault|

Perhaps nothing says as emphatically that market valuations are divorced from reality as the fact that equity and bond markets are essentially ignoring the increasing risk that Russia invades Ukraine.  Investors have grown used to shrugging off geopolitical risks – see just the brief chills after Russia’s previous invasions of Crimea and Georgia as cases in point.  But this time is different because this time Ukraine is a critical link in Europe’s energy supply, macroeconomic stress in Europe will have immediate global repercussions, and Vladimir Putin is making it more than clear that this time he’s not just playing around with minor nations he thinks of as vassal states.  This time, he will go to the economic map if he believes the Western response to his invasion might pose too much risk to Russia’s economy and his popularity and there’s no reason to doubt him.  As a result, I hope Treasury and the Fed are keeping a careful eye on the Treasury market and global payment system, not to mention on the cyber-security on which core market infrastructure rests.  The threat is all too real.

Treasury has long known that the “nuclear option” when it comes to economic sanctions is denying Russia access to any financial institution with any kind of domicile in the U.S. or any point of access to the U.S. payment system topped off by SWIFT sanctions blocking Russian access to the global payment system.  If Treasury fires these high-powered missiles – and it’s likely to have …

1 12, 2021

FedFin on Federal Crypto Powers

2023-05-23T14:22:26-04:00December 1st, 2021|The Vault|

Although the OCC joined other agencies issuing a non-committal “roadmap” for future cryptography actions, the agency at the same time and far more decisively stated that crypto activities are permissible only if they are also safe and sound.  As a result, national banks and federal savings associations (FSAs) may no longer simply undertake approved crypto activities and now instead must receive prior OCC consent to do so.  This may prove challenging to banks now using or seeking to use national charters for their own businesses, for partnerships with state-chartered entities, or via their own fintech ventures.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

19 10, 2021

FedFin on: Banking Dems, GOP Demand More, Tougher Sanctions

2023-06-07T15:42:15-04:00October 19th, 2021|The Vault|

Today’s Senate Banking hearing with Treasury Deputy Secretary Wally Adeyemo showed bipartisan concern that the Administration is failing to implement sanctions required by law, especially when it comes to China, North Korea, and Russia.  Senators also stated that they will not tolerate what they call continued defiance of Congressional mandates without making clear what they intend to do to enforce their will should Treasury fail to act.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

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