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Yesterday in reading the minutes from the FOMC’s November 2021 meeting, I noticed that once again (see previous post), some participants expressed concern about “the risk of a sudden reduction in the liquidity of collateral used at central counterparty clearing and settlement systems.” (p.9)  I’ve been wanting to read Dermot Turing’s Clearing and Settlement (3rd ed.) since receiving a review copy (for which I’m very grateful!).  So, given comments about clearinghouses in recent FOMC meeting minutes, I thought this would be a great time to get started! Robust clearinghouses remain critical to global financial market stability.  

Until 2014, Dermot Turing was a partner at Clifford Chance, specializing in “financial sector regulation, particularly the problems associated with failed banks, and financial market infrastructure.”  He’s also the nephew of famed computer scientist Alan Turing and has written books about his uncle (here) and historical works about computing (for example, here ).  I’ve read several of Turing’s articles related to financial market infrastructures (for example, here and here) and have always learned a lot.  So, I’ve decided to start reading through Clearing and Settlement (the book) and to invite interested BLPB readers to…

Since reading the Minutes of the Federal Open Market Committee July 27-28, 2021, I’ve wanted to learn more about the following statement: “Some participants cited various potential risks to financial stability including the risks associated with expanded use of crypotcurrencies or the risks associated with collateral liquidity at central counterparties [CCPs] during episodes of market stress.” (p.11)  Today, I finally got my wish in reading about CCPs and collateral liquidity risks in the Federal Reserve’s recently released November 2021 Financial Stability Report (Report).   

A box on p.51 of the Report entitled, Liquidity Vulnerabilities from Noncash Collateral at Central Counterparties, provides background on CCPs and collateral posting practices, noting that CCPs might need to monetize quickly noncash collateral in a time of extreme financial market stress.  Were a CCP unable to do this, it could lead to a clearing member’s failure and further stress in markets.  CCPs have liquidity requirements, which encompass cash and tools to monetize noncash collateral.  The Report states: “The designated CCPs generally rely on three types of tools to monetize noncash collateral: (1) committed tools, such as committed lines of credit or committed foreign exchange swap facilities; (2) rules-based tools, for which the CCP…

For BLPB readers interested in financial market infrastructures (FMIs), there’s something new and exciting to put on your fall reading list!  Don’t wait too long.  Comments on the new CPMI-IOSCO Consultative report: Application of the Principles for Financial Market Infrastructures to stablecoin arrangements are due by December 1, 2021.

At the request of the G7, G20, and FSB, the standard setting bodies have produced a “report [that] provides guidance on the application of the Principles for financial market infrastructures (PFMI) to systematically important stablecoin arrangements (SAs), including the entities integral to such arrangements.” 

The Executive Summary notes that: “Notwithstanding the fact that the transfer function of SAs is considered an FMI function for the purpose of applying the PFMI, SAs may present some notable and novel features as compared with existing FMIs. These notable features relate to: (i) the potential use of settlement assets that are neither central bank money nor commercial bank money and carry additional financial risk; (ii) the interdependencies between multiple SA functions; (iii) the degree of decentralisation of operations and/or governance; and (iv) a potentially large-scale deployment of emerging technologies such as distributed ledger technology (DLT).”

The report’s guidance is summarized in Table 1 (p. 5-6)…

I had a chance to read Chapter 7 on Clearinghouses [CCPs] in a recent report by the Task Force on Financial Stability and look forward to reading more of the report soon.  It’s a short chapter with a lot of excellent information.  I particularly appreciated its focus on the issue of clearinghouse ownership (too often left out of clearinghouse discussions), incentive misalignments, and tensions between shareholders and clearing members when CCPs are for-profit, public companies.  There is an especially helpful discussion on externalities in the current clearing ecosystem and a summary table of them accompanied by related recommendations (p.99).  I agreed with several of the chapter’s recommendations (starting on p.96) and with the statement that “Pervasive reforms of derivatives markets following 2008 are, in effect, unfinished business; the systemic risk of CCPs has been exacerbated and left unaddressed” (p.96). 

On p.94, the report mentions that clearing members “complained when, in December 2017, the CBOE and CME listed bitcoin contracts (which have extremely high volatility and which many members were not authorized to transact) and then commingled the contracts with the default fund for other instruments.”  I think the complaints are understandable and pointed out this issue in a previous post…

I’m so excited to present later this morning at the University of Tennessee College of Law Connecting the Threads Conference today at 10:45 EST. Here’s the abstract from my presentation. In future posts, I will dive more deeply into some of these issues. These aren’t the only ethical traps, of course, but there’s only so many things you can talk about in a 45-minute slot. 

All lawyers strive to be ethical, but they don’t always know what they don’t know, and this ignorance can lead to ethical lapses or violations. This presentation will discuss ethical pitfalls related to conflicts of interest with individual and organizational clients; investing with clients; dealing with unsophisticated clients and opposing counsel; competence and new technologies; the ever-changing social media landscape; confidentiality; privilege issues for in-house counsel; and cross-border issues. Although any of the topics listed above could constitute an entire CLE session, this program will provide a high-level overview and review of the ethical issues that business lawyers face.

Specifically, this interactive session will discuss issues related to ABA Model Rules 1.5 (fees), 1.6 (confidentiality), 1.7 (conflicts of interest), 1.8 (prohibited transactions with a client), 1.10 (imputed conflicts of interest), 1.13 (organizational clients), 4.3 (dealing…

Last spring, I blogged about a University of Colorado Law School Symposium honoring Professor Art Wilmarth (here).  Professor Jeremy C. Kress recently posted his symposium-related piece, Who’s Looking Out For The Banks?  It addresses an important bank governance issue that thus far has received too little attention.  Here’s its abstract:

When the Gramm-Leach-Bliley Act authorized financial conglomeration in 1999, Professor Arthur Wilmarth, Jr. presciently predicted that diversified financial holding companies would try to exploit their bank subsidiaries by transferring government subsidies to their nonbank affiliates. To prevent financial conglomerates from taking advantage of their insured depository subsidiaries in this way, policymakers instructed a bank’s board of directors to act in the best interests of the bank, rather than the bank’s holding company. This symposium Article, written in honor of Professor Wilmarth’s retirement, contends that this legal safeguard ignores a critical conflict of interest: the vast majority of large-bank directors also serve as board members of their parent holding companies. These dual directors are therefore poorly situated to exercise the independent judgment necessary to protect a bank from exploitation by its nonbank affiliates. This Article proposes to strengthen bank governance — and better insulate banks from their nonbank…

In January of 2020, The Bharara Task Force on Insider Trading released its report recommending that Congress adopt sweeping reforms of our insider trading enforcement regime. And it appears there is at least some momentum building to act on this recommendation. In April of 2021, the House of Representatives passed the Promoting Transparent Standards for Corporate Insiders Act, and in May of 2021, the House passed the Insider Trading Prohibition Act.  I have expressed some concerns about these bills (see, e.g., here and here). But, as I argue in my book, Insider Trading: Law, Ethics, and Reform, I am in complete agreement with the claim that our current insider trading regime is broken and needs to be reformed.

We should not, however, rush to adopt a new insider trading regime without first thoughtfully considering what constitutes insider trading; why it is wrong; who is harmed by it; and the nature and extent of the harm. The answers to these questions have been subject to endless academic debate, but are crucial for determining whether insider trading should be regulated civilly and/or criminally (or not at all), as well as for determining the nature and magnitude of any…

Professor Martin Edwards (Belmont University College of Law) and I are excited to moderate a discussion group titled, “A Very Online Economy: Meme Trading, Bitcoin, and the Crisis of Trust and Value(s)—How Should the Law Respond,” at the 2022 American Association of Law Schools Annual Meeting. The discussion group is scheduled to take place (virtually) on Friday, January 7, 2022. We welcome responses to the call for participation (here). Here’s the description:

Emergent forces emanating from social and financial technologies are challenging many underlying assumptions about the workings of markets, the nature of firms, and our social relationship with our economic institutions. The 21st century economy and financial architecture are built on faith and trust in centralized institutions. Perhaps it is not surprising that in 2008, a time where that faith and trust waned, a different architecture called “blockchain” emerged. It promised “trustless” exchange, verifiable intermediation, and “decentralization” of value transfer.

In 2021, the financial architecture and its institutions suffered a broadside from socialmedia-fueled “meme” and “expressive” traders. It may not be a coincidence that many of these traders reached adulthood around 2008, when the crisis called into question whether that real money, those real securities, or that…

The AALS Section on Financial Institutions and Consumer Financial Services invites submissions of no more than five pages for its session at the 2022 annual meeting of the AALS.  Next year’s annual meeting will be held virtually from January 5-9, 2022, with the date and time of the Section’s session yet to be announced.  The submission can be the abstract and/or introduction from a longer paper, and it should relate to the following session description:

Climate Finance and Banking Regulation: Beyond Disclosure? 

 In the United States, banking regulation has been slower than other forms of financial regulation (and slower than its European counterparts) to address climate-related financial risks.  This panel explores the proper role of banking regulation in addressing the physical and transition risks from climate change.  Possible measures include:  standardized, mandatory climate risk disclosures by banks; supervisory assessments of climate-related financial risk; capital and liquidity regulation; climate risk scenario tests; determination of the appropriate role of banks in mitigating climate risk; financial stability oversight of climate risk; and action (through the Community Reinvestment Act and otherwise) to deter harms to disadvantaged communities and communities of color from climate change.

Please email your anonymized materials by Friday, July 16, 2021, to Joe Graham, jgraham@bu.edu.  Please also indicate, in…

Friend of the BLPB, Professor Sagi Peari, recently shared the great news about the publication of his second book with Oxford University Press, International Negotiable Instruments (w/Professor Benjamin Geva).  A huge congratulations to the profs on this impressive accomplishment on such an important topic!  Here’s the book abstract:

For centuries, negotiable instruments have played a vital role in the smooth operation of domestic and international commerce. The payment mechanisms have been subject to rapid technological progress and law has needed to adapt and respond to ensure that the legal framework remains relevant and effective. This book provides a comprehensive and thorough analysis of the question of applicable law to negotiable instruments. Specifically, the authors challenge the conventional view according to which the fundamentals of negotiable instruments law are excluded from the scope and insights of general contract and property law doctrines and as such not subject to the general conflict of laws rules governing them. The authors make concrete suggestions for reform and contemplate on the nature of the conflict of laws rules that can also be applied in the digital age of communication.