Fed Eyes Margin Rules to Bolster Oversight
WASHINGTON—The Federal Reserve is dusting off a legal power it has largely ignored for four decades, a move that could significantly expand the Fed’s influence over financial markets. Margin requirements—rules limiting what portion of stocks or bonds can be purchased through borrowing—are moving up the Fed’s to-do list as officials fret about whether they have adequate tools to suppress dangerous asset bubbles that could lead to another financial crisis. They also allow the Fed to exert influence on all financial firms, not just banks. A little-noticed global agreement recently paved the way for the central bank to move forward with plans to alter margin requirements…. Fed officials will also have to consider how new margin requirements interact with other rules, such as liquidity requirements that limit banks’ activities in securities-financing markets by penalizing them for taking on too much short-term credit. Karen Petrou, managing partner of the policy-analysis firm Federal Financial Analytics Inc., said those rules already mean fewer buyers and sellers in the market on a given day, which can cause volatile price swings during stressful periods. Margin requirements could exacerbate that problem if they make it even harder for banks to participate in the market. “These rules may improve the markets’ security, but they may well undermine their liquidity because you have fewer players” in a time of stress, she said.