February Regulatory Update

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Last year, the president’s budget sought to increase the CFTC’s budget to $280 million from $215 million, a 30% boost. However, that proposed increase was ultimately cut almost in half to just 16%.

The SEC also stands to get a big boost. The proposed 2016 budget seeks to increase the Commission’s funding by 15%, or $260 million, to $1.722 billion. The extra funding would allow the agency to hire 431 additional staffers, 225 of whom would be added to the agency’s OCIE. Of those 225, 180 would examine advisors and investment companies. Ninety-three staffers would be devoted to enforcement, and 37 new positions would be added to bolster market oversight, including overseeing newly registered entities and to perform economic analysis.

The president's budget plan also seeks to change the tax treatment for derivatives. Under the proposed plan, derivatives transactions would no longer be marked to market with capital gains or losses on such transactions taxed as 60% long-term and 40% short-term. Instead, proceeds would be treated as ordinary income or losses at the end of each year, even if the actual gains or losses had not been realized. If approved at the hearings, the new tax treatment would apply to derivative contracts entered into after December 31, 2015.

One other interesting thing in the new budget plan: there is a proposal to impose a seven basis point fee on the roughly 100 large U.S. financial firms with assets in excess of $50 billion. Designed to help “rein in excessive leverage [and] improve economic stability,” the fees are projected to raise $112 billion over 10 years on these highly-leveraged entities. However, that’s all pie in the sky in my opinion. The proposal is unlikely to survive a Republican-dominated Congress.

Meanwhile, across the Atlantic, European regulators continue to lag behind their American counterparts. ESMA recently decided not to move forward with mandatory clearing requirements for foreign exchange non-deliverable forwards. While it may propose such requirements at a future date, for now it needs more time to address concerns such as the timing for the entry into force of a potential clearing obligation, the availability of clearinghouses that can clear NDFs, the experience of counterparties with NDF clearing, and the “importance of international consistency in the implementation schedule of the clearing obligation.”

In other clearing news, CME Group has overhauled its margin model for CDS to provide a “more holistic model” of risk in a CDS portfolio. According to CME, the new margin model, which went into effect on February 2, is “more accurately aligned” with the market and can be applied to a broad range of credit instruments. CME also made its first move in the international clearing arena. As of February 2, the company, whose CDS clearing services were previously limited to North American indices, began clearing CDS based on the iTraxx Main and iTraxx Crossover indices. Both indices are subject to the CFTC's mandatory clearing requirements. Finally, CME announced plans to close the bulk of its futures trading pits in Chicago and New York by July 2. Equity index futures pits and the DJIA ($10) and NASDAQ-100 options pits will close following the expiration of the June 2015 contract on June 19, 2015. However, S&P 500 futures and options on futures pits which will remain open. All other futures pits will close on July 2. According to the company, open outcry trading has fallen to 1% of total futures volume.

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