Wenqian Huang at the Bank for International Settlements recently posted a new version of her working paper: Central counterparty capitalization and misaligned incentives.  Here’s its abstract:

Financial stability depends on the effective regulation of central counterparties (CCPs), which must take account of the incentives that drive CCP behavior. This paper studies the incentives of a for-profit CCP with limited liability. It faces a trade-off between fee income and counterparty credit risk. A better-capitalized CCP sets a higher collateral requirement to reduce potential default losses, even though it forgoes fee income by deterring potential traders. I show empirically that a 1% increase in CCP capital is associated with a 0.6% increase in required collateral. Limited liability, however, creates a wedge between its capital and collateral policy and the socially optimal solution to this trade-off. The optimal capital requirements should account for clearing fees.

For those who understand the different incentive structures associated with member versus investor owned clearinghouses, some of the model’s finding will be unsurprising: in the absence of capital requirements (such as in the U.S.), member-owned clearinghouses hold more capital than investor-owned institutions.  This has important public policy implications.  Nevertheless, as I noted in an earlier post…

In today’s post, I address the second of the two questions at the heart of Wharton Professor Richard Shell’s Springboard: Launching Your Personal Search for SUCCESS: How will I achieve my idea of success (see last week’s post for question 1)?  

Shell offers 5 Steps covered in Chapters 5-9 (if you’ve yet to formulate your idea of success, jumpstart with his Six Lives Exercise)

Step #5: Look Inside to Find Your Unique Combination of Capabilities

I love the quoted Danish folk saying that opens this chapter: “You must bake with the flour you have.”  Given my affinity for cooking, I was intrigued by its opening story about the circuitous life path of the famous French chef Julia Child (want details? read the book!).  Using the story of Child and others, Shell steers the reader through a reflection upon one’s achievement skills, backyard diamonds, and personality strengths through his SAME assessment exercise. 

I think the genius of this chapter is that it seems to suggest that just as we all have a unique combination of DNA, we all have a unique mix of gifts, talents, personality strengths etc. and that it’s in understanding, nurturing, and harnessing this…

During the first-half of this spring semester, I’m teaching an MBA-level Business Ethics/Legal Studies course.  On Tuesday, we’ll discuss one of my absolute favorite books: Springboard: Launching Your Personal Search for Success by Wharton School Professor Richard Shell.  Making this book required reading reinforces the course’s emphasis on ethics and values, and is designed to help students articulate long-term core values around meaningful work.  Given that a Gallup 2017 State of the Global Workplace survey reports that “85% of employees worldwide are not engaged or are actively disengaged in their job,” this objective strikes me as a meaningful task.

In the Introduction, Shell chronicles generally what he terms his “odyssey years,” which included a variety of short-lived jobs, self-help research and seminars, travels across the globe, and collapsing in the mud with hepatitis in Afghanistan one Christmas Eve (for more, read the book!).  Ultimately, the experiences and lessons learned during these years led Shell to his first academic position at Wharton at age 37, and to a life-long interest in the study of success.  He recalls: “If you had told me that night [that Christmas Eve] that I would one day graduate from law school near the top…

On Friday, I read several recent pieces on domestic and global financial market developments that I thought worth highlighting for readers.  Enjoy!

In America faces a battle to find buyers for its bonds, the Financial Times’ Gillian Tett notes important buying shifts in the market for U.S. Treasury bonds and the need to think about who “will buy this looming mountain of Treasuries” in the coming years.  The Treasury Borrowing Advisory Committee estimates that the U.S. will need to sell $12tn of bonds in the next ten years (an amount greater than in the past decade).  China’s holdings of U.S. Treasuries have been declining (from about $1.25tn three years ago to approximately $1.12tn in November 2018), but domestic savers have increased their holdings of U.S. Treasuries (from about $1.9tn in January 2018 to $2.3tn in November 2018).  As “the US need for debt is steadily increasing,” Tett’s article invites readers to think about a really critical issue.

Several years ago in my article on The Federal Reserve’s Use of International Swap Lines, I wrote about the Bank of England becoming the first major central bank to establish a central bank swap line with the People’s Bank of China. …

I teach in the Energy Management Program at the University of Oklahoma, which was “the first of its kind” and recently celebrated its 60th Anniversary Diamond Jubilee.  Last spring, the title of a book in the office’s library caught my eye: Just Because You Can Doesn’t Mean You Should. The importance of prudence, a sensible and careful attitude when you make judgements and decisions; behaviour that avoids unnecessary risks, is often underappreciated, particularly in the area of financial market innovation.  Intrigued, I borrowed the book and began to read.  Although I’d never spoken with its author, Mike S. McConnell, I’d seen him in attending the Program’s Board of Advisors Meetings. 

The book’s Introduction has a great quote that I’ve now used in both classroom and lecture settings: “We did things because we could do them – not because we should do them.  I think Enron crossed the line between “could” and “should” and never actually saw it.  Moreover, it happened at many levels, from matters with the Board to our contention that “gray” financial structures were within the rules.  These structures may have been within the rules, but I’m not sure that means we should have used…

Yesterday, I had the honor of participating in a symposium organized by the University of Pennsylvania Journal of Business Law, in collaboration with the Center for the Study of Business Ethics, Regulation, & Crime at the University of Maryland (C-BERC), on Harmonizing Business Law.  It was a well-organized, engaging, and informative event.  It also introduced me to some great research that I plan to highlight today and in future posts.  

I’ll keep this first look brief as I traveled all day and I want to circle back to this topic later once I learn more.  Gideon Mark, Associate Professor and Associate Director of C-BERC at the Robert H. Smith School of Business at the University of Maryland, discussed Spoofing and Layering, noting the minimal attention these topics have received in business law scholarship.  If you’re like me, you’re probably vaguely aware of these concepts, but couldn’t provide an elegant definition on your own.  Let me help.  Section 747 of Dodd-Frank, which amends the Commodity Exchange Act to prohibit disruptive trading practices, terms “bidding or offering with the intent to cancel the bid or offer before execution” to be spoofing.  Layering is a specific type…

Today, I’d planned to blog about what their early 2019 speeches suggest is on the minds of policymakers at U.S. financial regulatory agencies as the New Year begins.  I decided to wait a few weeks to collect more data.  However, my initial research included a visit to the Federal Reserve Bank of Minneapolis (FRBM) site and led me to the subject of today’s post.

Last week, Neel Kashkari, the President and CEO of the FRBM, participated in a live Intelligence Squared U.S. (IQ2US) debate (in partnership with Foreign Affairs) on whether Ten Years After the Global Financial Crisis, the System is Safer (Resolution).  According to its website, IQ2US has now held 160 debates with 500 debaters.  Before a debate, the audience votes “yes,” “no,” or “undecided” about a resolution.  After three rounds of debate (opening statements, responses and audience questions, and closing statements), the audience votes again.  Each debate team argues for or against the resolution of the day.  The team whose numbers have increased the most in the final vote wins. 

Kashkari, in addition to debate partner Jason Furman, a top economic adviser to President Obama and former Chairman of the Council of Economic Advisers, debated…