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Spring 2014 Archive

WEEK 15: April 22: This is our last class of the semester and will be a review session.

WEEK 14: April 14-18 On Tuesday we will focus on issues relating to compliance. Please read International Finance Materials 2014: Chapter 5d: Compliance and SIFMA, The Evolving Role of Compliance (March 2013).
Update Monday April 14: here is a short document for Thursday’s class: International Finance Materials 2014 : Chapter 5e: Proceeds of Crime. On Thursday we will also carry out the class evaluation. And the following Tuesday we will review the semester, which will be an opportunity for you to ask questions. You can of course ask me questions outside class, by email or in person.

WEEK 13: April 7-11 We will follow the Libor scandal with some materials which focus on sanctions and asset freezes. The first part of the material I am assigning for next week relates to the multilateral sanctions regimes administered through the UN and includes two rather long court decisions addressing challenges a person designated as a terrorist brought in the EU and US courts. So, for Tuesday’s class please read International Finance Materials 2014: Chapter 5c: Asset Freezes. The second part of the material focuses on enforcement actions against banks for sanctions-busting. For Thursday’s class please read: Cease and Desist Order relating to Standard Chartered, Settlement Agreement relating to Standard Chartered, Cease and Desist Order Relating to RBS and Settlement Agreement Relating to RBS.

WEEK 12: Mar 31- Apr. 4: On Tuesday we will discuss The Bank of England’s supervision of financial market infrastructures — Annual Report (Mar. 2014), and please also read to page 26 of International Finance Materials 2014: Chapter 5b : Libor. For Thursday please read the rest of the document.

WEEK 11: Mar. 24-28: The idea of the materials on capital adequacy is to get an overview of the evolution of the international capital adequacy standards from a simple, rough and ready start, through a period of recognition of banks’ own risk models (which we might describe as deregulation) to a period of focusing on crisis response. I think the materials indicate (without detailed evidence) that it is very difficult to achieve harmonization of capital adequacy. On Tuesday we will discuss the rest of International Finance Materials 2014: Chapter 4a- Capital Adequacy. Then we will look at a case which illustrates banks’ actions to work around these capital adequacy requirements: Barclays Bank PLC v Unicredit Bank AG – please read the judgments of the Commercial Court in 2012 (Mr. Justice Popplewell) and of the Court of Appeal of March 20, 2014.

For Thursday please read International Finance Materials 2014: Chapter 5a:Eurodollars and The Bank of England’s supervision of financial market infrastructures — Annual Report (Mar. 2014).

Note Mar. 26: The definition of change in law for the Increased Costs Clause I provided is as follows:

“Change in law” means the occurrence, after the date of this agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation or application thereof by any governmental authority or (c) the making or issuance of any request, guideline or directive (whether or not having the force of law) by any governmental authority.

I moved the comment to the archive.

WEEK 10: Mar. 17-21 I hope you enjoyed the break. As we make our way towards the end of the semester please do bear in mind that I am available to answer questions you may have about the material in class and out of class by email or in person (please email me if you would like to set up an appointment).

On Tuesday we will begin by finishing up our discussion of the UK Prudential Regulation Authority’s Consultation Paper Supervising International Banks: the PRA’s approach to branch supervision – CP4/14. Then we will discuss Deutsche Bank’s Resolution Plan (October 2013). Please also read pages 1-20 of Financial Stability Board, Key Attributes of Effective Resolution Regimes for Financial Institutions (Oct. 2011). Do you think that resolution plans are likely to achieve their objectives?

For Thursday please read International Finance Materials 2014: Chapter 4a- Capital Adequacy and this Increased Costs Clause.

Last spring I asked a question on the exam (2 questions to be answered out of 5 options) about capital adequacy (based on a quote from a speech that was part of the assigned materials for the course). Here is the question:

“Is risk-risk-weighting of bank assets worth the costs? Are bank’s internal risk models more regulatory trouble than they are worth? Does complexity unduly advantage large incumbents over small new entrants? Are armies of supervisors and compliance officers a sign of success or failure? These questions should form the new regulatory battleground.”
Andrew Haldane, Turning the Red Tape Tide, April 2013. Discuss.

Mar. 19: As a footnote to our thinking about the too-big-to-fail issue, you may be interested in this article about banks which are too small to save. And here is an excerpt from a speech by Mark Carney, Governor of the Bank of England, which addresses the idea I mentioned in class yesterday that the UK wants to be seen as a leader in financial regulation at the international level:

To realise globalisation’s promise and deliver strong, sustainable and balanced growth, policymakers must re-build an open, integrated and resilient global financial system. As the leading global financial centre, the UK will be central to this task…. through its intellectual leadership and international relationships, the Bank can help complete the G20’s ambitious programme of financial reform including building resilient financial institutions, ending too big to fail, making derivative markets safer and transforming shadow banking to market based finance. Sir Jon Cunliffe, one of the original architects of the Financial Stability Board, is leading this effort. The job is too big for one person and requires a well-resourced and focused international strategy that draws on all areas of the Bank. That is why we are pooling our prudential policy teams in a single directorate and bringing together our international teams to increase insight and impact.

WEEK 9: Mar. 10-14: Spring Break. I hope you enjoy the break. I will post assignments for the week after spring break at the end of next week – probably late on Friday (the 14th).

WEEK 8: March 3-7 Next week we will continue to focus on banking regulation, working through International Finance Materials 2014: Chapter 4: Cross Border Financial Regulation. On Tuesday we will begin with the Federal Reserve’s Rule on Foreign Banking Organizations looking at why the Fed decided to impose extra obligations on certain FBOs and the evolution from the proposal to final rule in response to comments. We will also be able to begin to think about dual banking regulation in the US. I said we would then be able to think about how in the US and EU there are roles for state and Member State regulators and also for Federal and EU-level regulators.

The issue of how regulators deal with foreign bank branches has a lot of different aspects. We have already seen some of these. Here is another: last year the SEC issued Financial Responsibility Rules for Broker-Dealers which include requirements broker-dealers have to meet when they deposit money to meet reserve requirements. The rules require broker-dealers to look at the equity capital of the bank, identified on reports the bank files (Call Reports). However, foreign bank branches do not have an equity capital line item in these reports because they are not capitalized separately. Does this mean that broker-dealers can’t place these deposits with US branches of foreign banks? The SEC is currently thinking about this issue and has issued a no action letter to say that it will not be enforcing compliance with the rule while it thinks.

For Thursday’s class, please read The UK Prudential Regulation Authority’s Consultation Paper Supervising International Banks: the PRA’s approach to branch supervision – CP4/14, published this week, and Deutsche Bank’s Resolution Plan (October 2013)

The Fed’s Resolution Plans page states:

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve periodically submit resolution plans to the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). Each plan, commonly known as a living will, must describe the company’s strategy for rapid and orderly resolution in the event of material financial distress or failure of the company, and include both a public and confidential section.

Mar. 4, 2014: Naked Capitalism asks what value banks contribute to the economy; Why Russia no longer fears the west.

Comment: Edel Gonzalez – March 6, 2014 Hey All, Since we were discussing the issues of jurisdiction when neither contracting party is from the country in which the issue is being raised, I thought this SCOTUS decision would be interesting.
http://www.supremecourt.gov/opinions/13pdf/12-138_97be.pdf

WEEK 7: February 24-28 On Tuesday we will continue to discuss the development of the European Banking Union using the IMF Staff Discussion Note, A Banking Union for the Euro Area (Feb. 2013) as the basis for the discussion. Essentially the Eurozone is seeking to centralize some aspects of bank supervision and regulation within the euro area, but in a way that may not work well with the existing (and evolving) EU single market in financial services. Next week we will also begin to examine some features of banking and securities regulation within the US and at the international level based on International Finance Materials 2014: Chapter 4: Cross Border Financial Regulation. For Tuesday please could you read to page 18 of this chapter and for Thursday please read the rest. The Federal Reserve’s rules relating to foreign banking organizations address issues that arise in any jurisdiction when foreign firms subject to their own home state regulation access other markets. What sort of approach should the host jurisdiction adopt to such firms?

Notes
February 26: Here’s a criticism of some of Christine Lagarde’s (IMF Managing Director) recent comments on how the troika made mistakes with respect to Greek austerity.
February 27: Standard Life says it may relocate to England if Scotland becomes independent; Robert Peston comments, noting the Standard & Poor’s comment that the financial sector in Scotland would be large in relation to the rest of an independent Scotland (although financial services might relocate) (e.g. Lloyds Bank and Royal Bank of Scotland (surely RBS would need to change its name as well as its location – given recent regulatory actions that could be a good thing)).

WEEK 6: February 17-21 On Tuesday we will begin with wrapping up the UK Supreme Court’s decision in the Argentina case at pages 81-114 of International Finance Materials 2014 : Chapter 3 – Sovereign Debt and then we will look at the collective action clauses (CACs) in that chapter and consider the IMF’s idea of developing a formal mechanism for restructuring sovereign debt. The inclusion of collective action clauses in the original documentation for bond issues allows for a restructuring which will bind all creditors of a particular bond issue where a defined majority approves the restructuring by means of amendments of the terms. Without such a provision only those who agree to the amended terms are bound by them (consider the Argentina litigation we have focused on). For Tuesday’s class please also read Centre for International Governance Innovation, The Sovereign Debt Forum: Expanding our Tool Kit for Handling Sovereign Crises (Aug. 2013).
On Thursday we will consider some aspects of the EU’s sovereign debt crisis. Please read Allen & Overy, How the Greek Debt Reorganisation of 2012 changed the Rules of Sovereign Insolvency (2012) and IMF Staff Discussion Note, A Banking Union for the Euro Area(Feb. 2013).
Notes February 19: Further to our discussion of the idea of a sovereign bankruptcy regime here are some comments by Jeffrey Sachs in a 2003 article:

Managing sovereign insolvency is all politics.. countries of special geopolitical or military concern to the United States get special treatment.. it is too late to protest the basic concept of debt cancellation for insolvent sovereigns— since a great many countries of the world have availed themselves of this opportunity at one point or another in their history — and it is far too late to say that the current nonsystem is fair, efficient, or logical, rather than being fundamentally political.

WEEK 5: February 10-14 We will continue to work through International Finance Materials 2014 : Chapter 3 – Sovereign Debt. We will begin on Tuesday with the Second Circuit’s discussion of policy issues in Elliott v Banco de la Nacion (pages 39-40). Please read to page 81 for Tuesday’s class and to the end of the chapter for Thursday’s class. Here is an outline of the main features of the two sets of collective action clauses (CACs) in the materials.

A small number of jurisdictions have enacted legislation to block the ability of vulture funds to sue. For example, the UK enacted the Debt Relief (Developing Countries) Act 2010 (Explanatory Notes) initially for on year, but the Act was later (made permanent). But the UK legislation is tied to the Heavily Indebted Poor Countries Initiative (here is a link to the IMF factsheet), and most of the countries to which this initiative relates are in Africa. For background you may find it useful to read this article by Daniel R. Donovan, Preying on the weak: Vulture fund abuse in Africa.

WEEK 4: February 3-7: On Tuesday we will begin where we left off in International Finance Materials 2014: Chapter 2- Securities which involved thinking about the issue of the desirability of preventing the US from being the base for frauds committed abroad. This ties in with a more general issue I have with Scalia’s judgment in the case. Scalia uses the presumption against extraterritoriality combined with the language of section 10(b) to interpret the provision to have a very narrow territorial reach. And the insertion of the word “domestic” before transactions in other securities is how he accomplishes this. As we will see this term is a little indeterminate. But in one sense isn’t what the Second Circuit tests were trying to do separating the transactions which were sufficiently connected with the US for the US rules to apply from those which were not? I.E. What does the term “extraterritoriality” mean? Anyway, please read the rest of Chapter 2 for Tuesday.

On Thursday we will begin to think about issues relating to sovereign debt. Please read pages 1-47 of International Finance Materials 2014 : Chapter 3 – Sovereign Debt.

News this week: China Credit Trust avoided default.

Sovereign debt news: Owl Creek Asset Management LP, a hedge fund, is betting against Denmark’s sovereign bonds in anticipation of a debt crisis.

WEEK 3: Jan. 27-31 On Tuesday we will move on to the next section of the materials (we will first note a couple of issues in the material on foreign exchange in the first chapter of the materials). Please read this article on New York’s Separate Entity Rule and the Second Circuit’s recent decision in Tire Engineering & Distribution, L.L.C.. v. Bank of China Ltd.. Note that bank branches are a part of the bank, in contrast to subsidiaries which are separate legal entities. What do you think the rule should be? What factors should be taken into account in deciding what the rule should be?
This may not be enough material for Tuesday’s class, so we will begin to discuss International Finance Materials 2014: Chapter 2- Securities. The first part of this material involves the Supreme Court’s decision in Morrison v National Australia Bank. But I think that it makes sense to read the 2nd Circuit’s decision in the case at the same time as the Supreme Court opinions. So I am going to ask you to read to page 36 of this chapter for Tuesday. For Thursday please read to page 48 of this chapter.

WEEK 2: January 20-24 On Thursday we began to discuss International Finance Materials 2014: Chapter 1- Introduction finishing with the questions on page 15. On Tuesday this is where we will begin. Please could you read to page 52 for Tuesday’s class and page 78 for Thursday’s.

Next week (week 3) we will begin to think about the position of firms which have connections with different legal systems which may have different legal rules. We will first read a recent article on New York’s Separate Entity Rule and the Second Circuit’s recent decision in Tire Engineering & Distribution, L.L.C.. v. Bank of China Ltd. and then we will read some material on transnational securities litigation.

Jan 22, 2014: News this week: ISDA on the benefits of commodity derivatives (allowing producers to hedge against price declines); Airbus, Citi join corporate chorus warning against Britain leaving EU; the EU’s Court of Justice rejects a UK challenge to the power of ESMA (European Securities and Markets Authority) to regulate short selling; China’s wealthiest people and political leaders park funds offshore; David Zaring argues for federal regulation of insurance in the US (“keeping pace with Europe doesn’t work well with the American system of insurance regulation, where the federal role is minimal and each state has a different regulatory regime. This is where the Treasury Department’s call for a stronger federal role in insurance regulation, something that the largest insurance companies probably would like to see, makes sense.”)

The Chairman of TheCityUK (a trade group designed to promote the City of London – London’s financial center) spoke about the competitiveness of the UK financial sector:

London’s pre-eminence has been built on a rich mixture of historic competitive advantage and modern enterprise.
It is always said that we are in the “right” time zone. Well that is true for trade with some parts of the world but of course wrong for others. If, like me, you believe that the UK needs to be in the middle of trade between LATAM and Russia, well we’re in the wrong time zone for that – and indeed for many other parts of the world. So we can’t rest on our laurels.
Fortunately English has become the respected business language. But that’s a position not only reinforced by our global trading perspective. It is also founded on educating the children of the world’s elite in our schools and universities. Making it harder for the next generation of the best and brightest to come here risks tomorrow’s competitive advantage and our ability to attract global HQ’s because those who staff them know and like the UK.
We have built our leadership position on many other attributes including: an enviable openness to foreign investment and ownership, a world class legal system that has become a national export earner, and by being a great place to live as well as work.
All of that means that we have earned the right to compete on the global stage – but it is a tough game…Other EU member states are our largest export market with £15.2bn, or over one-third, of financial services exports heading across the Channel. This trade-barrier free access to a market of 500m people is hugely valuable to firms and is the basis of many, many jobs here in the City.
Indeed, in a recent study we conducted with global firms considering why they come to the UK, we looked at 147 location investment decisions. The single factor that was cited time and again was that the UK would provide easy access to the Single Market.
At the end of last year we asked CEOs, Chairmen, Senior Partners and others in the Boardroom how they regarded the City’s relationship of the EU. The results from this were very clear.
All those surveyed believed that the UK’s decision on membership of the EU is of national importance. 90% said it was important for their business, and a whopping 84% said that staying in the EU was the best option to secure the position of the UK as a global financial centre… There is a need to reform the EU. My sector worries about the extent of EU regulation which is ill-considered, misapplied or which has unintended consequences.
We want to see a more globally competitive Europe. One which is open to foreign investment and wants to compete for the opportunities in this century. Europe must be made more open, focus on being dynamic, commit to deepening the Single Market, be less bureaucratic and re-engage with its citizens if it is to meet the challenges ahead.
To be successful Europe must be more democratic, more relevant to its citizens, and be better at focusing on how jobs are created and economic growth can be galvanized. The best thing the EU can do is to set out why it can provide the answer to youth unemployment.
I’m struck that policymakers in Germany, the Netherlands, Sweden and Hungary, as well as the UK, have expressed a desire for reform. Perhaps we should remember the old adage that Europe works best when it works together? But let’s ensure we prioritise “National when possible, Europe when necessary”.

First class assignment: For the class on Thursday January 16, 2014 please read to page 24 of International Finance Materials 2014: Chapter 1- Introduction. The introductory materials are intended to raise some issues we will examine in more detail during the semester and to begin to develop familiarity with terminology and concepts.
For week 2 please read the rest of Chapter 1.

Here are the Class Policies.

Jan 16, 2014: Here are two recent news stories: the first relates to the issue of shadow banking in China (see this story at Naked Capitalism, and the linked piece by George Soros) and the second is the article in today’s New York Times about Iceland.

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