April 23, 2024

DealBook: Bracing for Storm, U.S. Stock Markets Close

The normally busy trading floor will be empty on Monday.Richard Drew/Associated PressThe normally busy trading floor will be empty on Monday.

12:50 a.m. | Updated

All United States stock and options markets will close on Monday as Hurricane Sandy approaches, as Wall Street braces for the storm to barrel through the heart of the country’s financial center.

The decision, made on Sunday night, leaves the American stock markets closed for weather conditions for the first time in nearly three decades. The New York Stock Exchange had previously planned on closing only its physical trading floor, while allowing for trading on its Arca electronic exchange. It has now decided to halt all trading.

The Nasdaq and BATS stock markets, which are built on electronic trading, also decided to close. The CME Group, which operates the Nymex commodities exchange, said it would halt trading on its physical commodities floor and on its electronic stock futures and options exchanges.

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The Securities Industry and Financial Markets Association, or Sifma, said in an e-mailed statement that it was calling for bond trading, which is all done electronically, to close at noon Monday, though it left the final decision to member firms.

The N.Y.S.E. last closed trading for weather reasons in 1985, when Hurricane Gloria lashed the metropolitan area. The opening of trading has been delayed a number of times, including during a blizzard in January 1996. The exchange was closed for three days after the terrorist attacks on Sept. 11, 2001.

Hurricane Sandy Multimedia

Since then, the business has largely moved onto electronic systems that are meant to work without the traditional army of floor specialists barking out orders. Exchanges had hoped that computerized platforms would allow the markets to open without endangering even a smaller number of staff members.

But after daylong discussions with city and state officials, brokerages, the Securities and Exchange Commission, the Federal Reserve Bank of New York and Sifma, the market operators decided to be even more cautious and halt trading for the day, according to a person briefed on the matter.

“We support the consensus of the markets and the regulatory community that the dangerous conditions developing as a result of Hurricane Sandy will make it extremely difficult to ensure the safety of our people and communities, and safety must be our first priority,” the N.Y.S.E. said in a statement on Sunday.

The decision came late: Nasdaq made its final determination around 10:30 Sunday night, according to a person briefed on the exchange’s decision.

Under the N.Y.S.E.’s contingency plan, traders would have routed their orders onto the company’s electronic exchange, while electronic options trading would operate normally. Volume was expected to be muted, and the decision over whether to open on Tuesday was to be determined later.

A spokesman for the N.Y.S.E., Robert J. Rendine, said the company’s data center in Mahwah, N.J., which handles all trade orders, is intended to withstand a storm of Hurricane Sandy’s strength. It also has generators and enough fuel to run for almost a week at current levels, with emergency plans in place to procure more fuel if needed, he added.

Since 2007, the N.Y.S.E. has offered a “hybrid” model that allows trades to be completed either by humans or by computers through the Arca system. That gave the exchange a contingency plan that was previously unavailable, said Duncan L. Niederauer, the chief executive of NYSE Euronext. The company has tested the backup plan regularly, most recently in March.

Many big banks are letting their employees work remotely, mindful of the suspensions of major transit systems and school closures.

Goldman Sachs and Citigroup said their major offices in Lower Manhattan — which house the firms’ enormous trading floors — would be closed to all but essential personnel. Some Goldman staff members will be asked to work from special centers in Greenwich, Conn., and Princeton, N.J., though the majority of employees at both firms will be allowed to work from home, according to internal memorandums.

“Citi has contingency plans in place including locations that can be utilized to ensure continuity of operations,” Shannon Bell, a spokeswoman for the firm, said in an e-mail statement. “Citi is committed to providing uninterrupted service to our clients during the storm and seeks to minimize any possible impact.”

JPMorgan Chase plans to close an office in Lower Manhattan that is in a potential flood zone, though its other offices will remain open and ready to run off backup generators if necessary.

Decisions on which Chase retail bank branches would be closed were still being decided on Sunday night, according to a person briefed on the matter. Chase also said it would waive overdraft and late fees for customers in seven states affected by the hurricane, including New York, New Jersey and Connecticut.

Ms. Bell of Citi said that the firm’s branches in affected areas would be closed.

Several of these firms plan to run some of their technology and trading operations through offices in Europe and Asia.

A version of this article appeared in print on 10/29/2012, on page B1 of the NewYork edition with the headline: Bracing for Storm, New York Stock Exchange to Close Trading Floor.

Article source: http://dealbook.nytimes.com/2012/10/28/nyse-plans-to-close-its-trading-floor/?partner=rss&emc=rss

Economix Blog: Simon Johnson: Should We Trust Paid Experts on the Volcker Rule?


Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

On Wednesday morning, two subcommittees of the House Financial Services Committee held a joint hearing on the Volcker Rule, which is named for the former chairman of the Federal Reserve, Paul Volcker, and is aimed at restricting certain kinds of “proprietary trading” activities by big banks. Its goal is to make it harder for these institutions to blow themselves up and inflict another deep recession on the rest of us.

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The Volcker Rule was passed as part of the Dodd-Frank financial reform legislation (it is Section 619), and regulators are currently requesting comments on their proposed draft rules to carry it out.

Part of the current issue is contentions by some members of the financial services industry that the Volcker Rule will restrict liquidity in markets, pushing up interest rates on corporate debt in particular and slowing economic growth.

This assertion rests in part on a report produced by Oliver Wyman, a financial consulting company. Oliver Wyman has a strong technical reputation and is definitely capable of producing high-quality analysis, but its work on this issue is not convincing, for three reasons. (The points below are adapted from my written testimony and verbal exchanges at the hearing.)

The report, “The Volcker Rule: Implications for the U.S. Corporate Bond Market,” was commissioned by the Securities Industry and Financial Markets Association, or Sifma, and is available on the Sifma Web page that contains its comment letters to regulators.

On Page 36 of the report, the disclaimer begins, “This report sets forth the information required by the terms of Oliver Wyman’s engagement by Sifma and is prepared in the form expressly required thereby.”

This does not mean – and I am not implying – that Oliver Wyman was instructed to find a particular kind of result. But the incentives of Sifma and its most prominent members are worth further consideration in this context.

The current chair of Sifma is Jerry del Missier, a top executive at Barclays Capital. The board includes executives from Morgan Stanley, Société Générale, UBS, BNP Paribas, HSBC, Deutsche Bank, Goldman Sachs, Citigroup, Royal Bank of Scotland, JPMorgan Chase, Credit Suisse, Royal Bank of Canada and Merrill Lynch.

All of these companies would be affected by the Volcker Rule, in the sense that they would have to give up some of their “proprietary trading” activities and perhaps be subject to other restrictions – as is noted by the Oliver Wyman report, which on Page 11 lists “the institutions that will be most affected by the Volcker Rule”; more than half of these institutions are on the Sifma board.

Such very large banks are perceived as too big to fail because their failure would be likely to cause huge damage to the rest of the financial system. As a result, the downside risks created by these institutions are borne, in part, by the government and the Federal Reserve – as a way to protect the rest of the economy.

In effect, these banks benefit from unfair, nontransparent and dangerous government subsidies that encourage reckless gambling – most notably in the form of “proprietary trading” (jargon for placing bets on which way markets will move).

When things go well, the benefits of these arrangements are garnered by the executives who run these companies (and perhaps shareholders). When things go badly, the downside costs are pushed in various ways onto the taxpayers and all citizens.

The Volcker Rule is intended to limit the implicit subsidies received by large banks that operate proprietary trading at any significant scale; this is clear from the repeated public statements of Mr. Volcker (who had the original idea) and Senators Carl Levin, Democrat of Michigan, and Jeff Merkley, Democrat of Oregon, who turned it into legislation as an amendment to Dodd-Frank.

We should therefore expect executives from big banks to oppose removal of these subsidies. To the extent that such subsidies may be expected to benefit shareholders, it can be argued that these executives have a fiduciary responsibility to do all they can to ensure that the effectiveness of the Volcker Rule be undermined.

Sifma itself has a clear mission: “On behalf of our members, Sifma is engaged in conversations throughout the country and across international borders with legislators, regulators, media and industry participants.”

There is nothing in its public materials to suggest the research it sponsors is intended to uncover true social costs and benefits; rather their goal is to advance the interests of their members. This is a lobbying group, after all.

Sifma asserts that it represents the entire securities industry, but more than one-third of its board is drawn from very large banks that would find their implicit subsidies cut and constrained by an effective Volcker Rule. Given this context, it is not clear why the Olivier Wyman study would be regarded as anything other than – or more convincing than – a relatively sophisticated form of special interest lobbying.

There is also a serious methodological issue. The study draws heavily on a paper by Jens Dick-Nielson, Peter Feldhutter and David Lando that looks at the liquidity premiums for corporate debt in recent years and contains plausible results. As Professor Feldhutter writes on his Web site: “Illiquidity premia in U.S. corporate bonds were large during the subprime crisis. Bonds become less liquid when financial distress hits a lead underwriter.” (Disclosure: Until recently I was on the editorial board of the Journal of Financial Economics, where the paper appeared, but I was not involved in the publication of this article.)

The Olivier Wyman study, however, goes far beyond those academic authors when it asserts that the Volcker Rule will make corporate bonds less actively traded – less liquid – and therefore increase interest rates on such securities. In particular, the Oliver Wyman approach appears to assume the answer – which is not an appealing way to conduct research.

Specifically, the study assumes that every dollar disallowed in pure proprietary trading by banks will necessarily disappear from the market. But if money can still be made (without subsidies), the same trading should continue in another form. For example, the bank could spin off the trading activity and associated capital at a fair market price.

Alternatively, the relevant trader – with valuable skills and experience – could raise outside capital and continue doing an equivalent version of his or her job. These traders would, of course, bear more of their own downside risks.

If it turns out that the previous form or extent of trading existed only because of the implicit government subsidies, then we should not mourn its end.

The Oliver Wyman study further assumes that the sensitivity of bond spreads to liquidity will be as it was in the depth of the financial crisis, 2007-9. This is ironic, given that the financial crisis severely disrupted liquidity and credit availability more generally – in fact this is a major implication of the Dick-Nelson, Feldhutter and Lando paper.

If Oliver Wyman had used instead the pre-crisis period estimates from the authors, covering the period 2004-7, even giving their own methods the implied effects would be one-fifth to one-twentieth of the size (this adjustment is based on my discussions with Professor Feldhutter).

The Oliver Wyman study also makes no attempt to estimate the benefits of the Volcker Rule, for example in terms of lower probability for a major financial collapse.

The biggest disaster for the corporate bond market in recent years was a direct result of excessive risk-taking by big financial players. The Volcker Rule is a step in the direction of making it harder to repeat that awful experience.

Powerful players in the financial sector are entitled to make their arguments against the Volcker Rule. But for-hire “research” that shows the rule will hurt the broader economy should not be regarded as convincing evidence.

Article source: http://feeds.nytimes.com/click.phdo?i=9dc9323764d2fa8060a41d9fa9ae2c11

DealBook: Wall St. Groups Sue Regulator to Challenge New Trading Rule

Gary Gensler, chairman of the Commodity Futures Trading Commission, testifying at a Senate Agriculture Committee hearing.Joshua Roberts/Bloomberg NewsGary Gensler, chairman of the Commodity Futures Trading Commission, testifying at a Senate Agriculture Committee hearing.

9:06 p.m. | Updated

Wall Street sought to deliver another blow to the financial regulatory overhaul on Friday, as two industry trade groups sued a federal regulator over a new rule restricting speculative trading.

The Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association filed a lawsuit challenging the Commodity Futures Trading Commission’s so-called position limits rule.

The agency adopted the rule in October to cap the number of contracts a trader can hold on 28 commodities. The vote was an important step in the Obama administration’s effort to enforce the Dodd-Frank overhaul.

But in the complaint filed in federal court in the District of Columbia, Sifma and I.S.D.A. argue that the commission erred when it completed the rule, contending that it failed to evaluate the rule’s economic impact on Wall Street.

“The evidence is overwhelming that position limits are, at best, unnecessary and may, at worst, negatively impact commodity markets and users,” Conrad Voldstad, the I.S.D.A. chief executive, said in a statement. A joint statement by Mr. Voldstad and T. Timothy Ryan Jr., Sifma’s leader, called the rule “poorly crafted” and based on “an incorrect reading of the law.”

It is unclear what will be the next step in the legal battle. A spokesman for the commodities commission declined to comment though Congressional supporters of Dodd-Frank chided the industry groups for bringing the lawsuit. “The financial industry tried to water down Dodd-Frank before it was enacted, has been trying to chip away at it since it became law, and is continuing that effort with this lawsuit,” Carl Levin, Democrat of Michigan, said in a statement.

The lawsuit is the latest indication that Wall Street is shifting fronts in the battle over Dodd-Frank, moving from backroom lobbying to the courtroom. A federal appeals court in July struck down the Securities and Exchange Commission’s so-called proxy access rule, a Dodd-Frank policy that would have made it easier for shareholders to nominate company directors. The court ruled that the S.E.C.’s cost-benefit analysis on the rule was inadequate.

The decision incited fear among regulators, and even caused several agencies to re-examine their Dodd-Frank rules. The Commodity Futures Trading Commission, mindful of possible legal challenges, delayed voting on its position limits rule on multiple occasions. The agency also agreed to delay the enforcement of many new position limits for at least a year.

But Wall Street lobbyists say the rule did not improve with time. The I.S.D.A. and Sifma note that Dodd-Frank leaves it to regulators to enforce position limits only “as appropriate.” The groups pushed regulators to interpret the fine print to mean that in essence, no limits were appropriate.

Bart Chilton, a Democratic member of the agency who is the chief advocate of the position limits rule, aimed to rebut those claims earlier this year. Mr. Chilton, in a speech in September at a United Nations panel, argued that Wall Street was “trying to dance on the head of a legal pin.”

Still, the lawsuit filed Friday accused the agency of writing an inadequate cost-benefit analysis and not allowing the industry to adequately comment on the rule proposal. The commission was inundated with letters about the position limits plan — about 15,000 comments.

The rule’s supporters promote the rule as the nation’s best hope for protecting consumers from speculative commodities trading. Over the last few years, the financial industry has increased its speculation in the futures market. At the same time, the prices of the underlying commodities have fluctuated wildly, driving up energy costs and food prices. The rule would set limits on traders accumulating position in commodities, including energy products and metals, like oil and gold. Previously, the limits covered only nine agricultural commodities, including corn.

The decision to challenge the rule in the courts, while significant, is hardly surprising. Over the last year, several financial trade groups have issued thinly veiled threats of legal action. In March, the Futures Industry Association urged the commission to drop its position limits plan, saying it “may be legally infirm.”

When the commission voted on the rule in October, the agency was fiercely divided, with three Democratic commissioners voting for the crackdown and its two Republicans voting against it.

Financial industry groups’ lawsuit against the C.F.T.C.

Article source: http://feeds.nytimes.com/click.phdo?i=501480295d971a0e09ea3d55301a7f92

DealBook: Wall Street Frets Over New Rules

Barry Zubrow of JPMorgan Chase.Brendan Smialowski/Bloomberg NewsBarry Zubrow of JPMorgan Chase.

Wall Street is stepping up its attacks on new financial regulation, warning Congress on Thursday that a wave of restrictions threatens to weaken big banks and the broader United States economy.

“The regulatory pendulum clearly has now begun to swing to a point that risks hobbling our financial system and our economic growth,” Barry Zubrow, JPMorgan Chase’s chief risk officer, said in prepared testimony before the House Financial Services Committee.

The concerns center on the Dodd-Frank Act, the financial regulatory overhaul that has emerged as the scorn of Wall Street. Enacted in the wake of the financial crisis, the law reforms some of the industry’s biggest profit centers, including derivatives trading and debit card fees.

JPMorgan Chase, Morgan Stanley and other financial titans are positioning themselves as victims of the law, amid rising fears that it will enable big European banks to poach their business. Foreign regulators, the banks complain, have a lighter touch than Washington policymakers.

“U.S. regulations that are being implemented on a unilateral basis are threatening the competitiveness of the U.S. markets,” Timothy Ryan, president and chief executive of the Securities Industry and Financial Markets Association, told the committee.

The banks in particular loathe the thought of tougher capital requirements. Under Dodd-Frank, a council of regulators must designate the financial firms — including mutual funds, private equity shops and hedge funds — that pose a systemic risk to the financial system. These firms, and banks like JPMorgan that have more than $50 billion in assets, will face higher capital requirements.

JPMorgan and its fellow Wall Street firms object to the additional layer of capital, calling it a “surcharge.” The banks note that the Basel Committee on Banking Supervision already is enforcing its own international capital requirements. The so-called Basel III rules require JPMorgan to hold 45 percent more capital than it had stored away during the crisis, according to Mr. Zubrow.

“Considering a capital surcharge above Basel III levels that does not adequately account for the changes that have been made,” he said.

Banks also predict a grim future for their derivatives business, an industry at the center of the financial crisis.

Dodd-Frank requires many derivatives contracts to be traded on regulated exchanges and run through clearinghouses, which act as a backstop in case one party defaults. Dodd-Frank, banks say, could push derivatives business and profits overseas as the rules do not match up with foreign regulations.

“It could put U.S. markets at a serious competitive disadvantage,” Stephen O’Connor, a top Morgan Stanley derivatives official and chairman of the International Swaps and Derivatives Association, said in prepared testimony on behalf of the association.

The Commodity Futures Trading Commission and the Securities Exchange Commission, charged with writing the new rules, recently delayed their implementation plan. But they still plan to finalize the regulations later this year, while international regulators plan to wait until the end of 2012.

The European Commission, the European Union’s executive body, has discussed similar rules, but the regulators may take until 2012 or later to complete the overhaul.

Gary Gensler, chairman of the trading commission, said his agency was “actively coordinating with international regulators to promote robust and consistent standards.”

Until the European rules are completed, banks in the United States say they will have to collect margin from pension funds and other investors looking to enter a derivatives deal. But a European bank booking a deal out of, say, London or Frankfurt would not have to collect any upfront collateral payments, giving them a competitive edge.

The “draconian” margin requirements could “effectively end” Wall Street’s overseas derivatives business,” Mr. Zubrow said.

Mr. Gensler noted, however, that new regulations were needed to rein in the derivatives markets.

“Though two years have passed, we cannot forget that the 2008 financial crisis was very real,” he told the committee.

Article source: http://feeds.nytimes.com/click.phdo?i=aa6828ea3f39b3f80c1b98bc3a90cca8