In testimony before the House Financial Services Committee hearing on “Systemic Regulation, Prudential Matters, Resolution Authority and Securitization, Managed Funds Association (MFA) reaffirmed its support for Congress to include, as part of financial regulatory reform, measures that would reduce the potential of a failing financial firm to jeopardize the financial system and the U.S. and global economy.
A careful, more intelligent system of functional regulation can play an important role in promoting financial market stability and restoring investor confidence, says Richard H. Baker, MFA president and CEO. The authorities provided to regulators in aspects of the Committee’s recently passed OTC derivatives reform, private fund adviser registration and investor protection legislation will, hopefully, reduce the work of the systemic risk regulator(s) and the likelihood that the proposed resolution framework ever needs be implemented. That said, it’s important that Congress, in seeking to establish a systemic risk regulatory regime including resolution authorities, be mindful of the potential moral hazard that can occur should markets, or market participants, deem the purpose of these authorities as empowering regulators to “save” a failing financial firm rather than, more appropriately, providing regulators with the tools necessary to ensure that the failure of a financial firm does not jeopardize the entire financial system or the broader economy.”
MFA provided its positions on the key issues addressed at the hearing.
To achieve the objectives of reducing the potential systemic risks of systemically relevant entities and developing appropriate resolution authorities, MFA believes that the systemic risk and resolution authority framework should have the following components:
A central systemic risk regulator with oversight of the key elements of the entire financial system, across all relevant structures, classes of institutions and products, and an assessment of the financial system on a holistic basis;
Confidential reporting by every financial institution, generally to its functional regulator, which would then make appropriate reports up to the systemic risk regulator;
Direct, prudential regulation of entities determined to be systemically relevant by the systemic risk regulator;
A clear, singular mandate for the systemic risk regulator to protect the financial system, including the ability to take action if the failure of a systemically relevant firm would jeopardize broad aspects of the financial system, and;
Clear rules regarding prudential regulation and resolution authorities so that investors, lenders and counterparties have certainty regarding the regulatory framework relevant to their activities.
In its testimony, MFA expressed concern with the approach taken in the Committee draft legislation that would subject a systemically relevant non-bank financial institution to the regulatory requirements of the Bank Holding Company Act (the BHCA), MFA noted that the BHCA was designed principally to separate banking and commercial activities for depository institutions and would not be an appropriate regulatory framework to apply to a non-bank financial firm that was deemed systemically relevant.
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