Talking Crypto Reporting; SEC Workers (Sort of) Return; CFPB Continues Credit Card Fights; Mutual Funds Unite to Oppose Pricing Rule
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With Congress out of town, there was a little less frenetic pace to financial regulation news. But special thanks to the SEC union and CFPB chief Rohit Chopra for continuing to make trouble. At the securities regulator, Chair Gary Gensler was finally able to implement his plan to bring the rank and file back from full-time telework after a federal labor panel issued a decision on workplace rules. Still, it won’t be crowded in the office. Employees only are required to come in twice a pay period. On the consumer protection front, the CFPB fired off a letter to big banks accusing them of not reporting all the data they have on credit card repayments — to the detriment of their customers. And the asset management industry responded very negatively to an SEC plan that is designed to help mutual funds better deal with times of market stress. For our Friday Q&A, we chatted about crypto oversight with an exchange veteran. He sees some interesting parallels between token trading and the swaps market before it came under federal regulation.
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Friday Q and A: Bruce Tupper is the founder of a company called CoinRegTech that provides compliance services for trading digital assets. We decided to track him down in Atlanta after reading a paper he put out recently on crypto oversight and the need for regulatory reporting of transactions. As the blow-up of FTX underscored, trading is so opaque that regulators, law enforcement and even customers have no idea what’s going on behind the curtain. Tupper wants to change that.
What was particularly interesting to us is that Tupper’s path to the virtual currency industry runs straight through traditional – and disrupted – finance. He started his career on the New York Mercantile Exchange’s open outcry floor where he checked paper cards to confirm trades. As everything moved to computers, Tupper joined a young, growing firm known as ICE where he built up a specialty in post-trade processing. That’s a seemingly boring, but vital part of the business where transactions are confirmed and recorded. He helped the exchange build systems where customers could access reams of trading data, both for their own purposes and to send it to regulators like the CFTC. Some of that government reporting ultimately was required by law when Congress passed the Dodd-Frank Act in the wake of the financial crisis. Now, Tupper sees a similar trajectory for tokens.
Read on to hear his thoughts on why regulatory reporting is necessary, even though token trades are ostensibly recorded on the blockchain. Tupper also discusses the idea behind having a DART, or a digital asset repository of transactions. (Yes, he’s been around long enough to know that nothing really takes off in finance unless it has an acronym.) What follows is our (lightly edited and condensed) conversation.
Capitol Account: So you realized pretty early that electronic trading was the future. How did you come to deal with post-trade issues?
Bruce Tupper: I was able to join ICE in 2000 after the big partners joined – Goldman Sachs, Morgan Stanley, a host of oil trading companies and other banks. I worked in a product development role, and I listed the first product offering on ICE. As the business kept growing, we realized that there were a lot of problems with post-trade processing. ICE was just growing and trying to figure it out. So I was offered [the job]: `Do you want to go develop this and solve these problems? These customers are complaining because they can't get the data from us.’
CA: What kind of information are we talking about?
BT: In the early days it was for swaps…Do these trades check out? It was a confirmation system. The industry was very paper intensive. We built post-trade APIs that allowed customers to download data.
CA: Is it used for compliance?
BT: It allowed customers to get the data in, and they could do compliance – market surveillance of traders, because there were market abuse cases in the commodities markets post-Enron. It helped with risk management, and also [was for] their own internal books and records.
CA: And then in 2010 Dodd-Frank mandated something called swaps data repositories. What’s that?
BT: [The law called for ] all kinds of changes, post the CDS meltdown. One of them was this whole regime around reporting data into the regulators…The regulators really didn't know what was going on…they didn't see the whole swaps book.
CA: This is beginning to sound like cryptocurrency trading.
BT: Yes it is.
CA: Now, bringing us up to the present, you helped build a swaps data repository for ICE. And your new venture wants to do the same for token trading.
BT: Reporting repositories allow regulators to have information to oversee markets and surveillances – [they’re for] customer protection…There's a multitude of oversight and infrastructure that we, from the industry, just take for granted because that's all we've known. But when you look at it with digital assets and crypto…none of that infrastructure is there. I made an early business bet, I guess you could say, that the industry was going to have to comply eventually – and that the regulators were going to want to see the data.
CA: As FTX showed, customer protection seems to be lacking in crypto trading.
BT: We know the downfalls with MF Global and the rules that came out of that – [that require] really treating customer funds in a manner that you’re a fiduciary. I thought that would've happened a little sooner [for crypto]. It's sad that the events we've had last year are bringing those about.
CA: Will reporting to regulators help solve the problem?
BT: When you have to sign off and register, and your compliance person [says]...these are accurate and complete to the best of my knowledge – that changes the game…The requirements, I believe, really change the way companies operate, and how they operate as a fiduciary.
CA: Digital assets firms have been strongly opposed to registering. Does that remind you of when you dealt with the Dodd-Frank swaps rules?
BT: I'll never forget, a lot of people said: `This is going to kill swaps.’ Those markets are multiples bigger than they were… I don't much believe in the argument that regulation is going to stifle innovation and it will all go offshore. That's the common talking point of the digital asset world…(Friday)
Back to Work, Union Style: Many Wall Street workers have been back in the office for at least a year. Now, the industry’s main regulator is (finally) following suit. The SEC’s rank and file workers are due back on March 27. But don’t expect a full house at the Washington headquarters, or any of the agency’s 11 regional offices either. Under a new collective bargaining agreement imposed by a federal labor panel this week, the staff only has to be in two days per pay period. They can telework the other eight.
The mandatory in-office time was a win for SEC Chair Gensler in drawn-out and bitter negotiations with the National Treasury Employees Union chapter that represents the agency’s workers. It had been pushing for what was essentially full-time remote work. Gensler instituted the two-day requirement for managers in January, but had been reluctant to pull the rest of the staff back in before the Federal Service Impasses Panel issued its non-appealable ruling on the bargaining agreement. (There are a couple of procedural steps before the deal is in place, but it is not expected to change.)
SEC union boss Greg Gilman told his troops in a note that the agreement’s “provisions will substantially improve our existing, pre-pandemic contract at the SEC.” Still, he took a few whacks at Gensler for not working constructively with the labor group and dragging out the talks. “Gensler’s inflexibility set the tone for what ultimately proved to be an extremely contentious and difficult process,” Gilman wrote.
The impasses panel did side with workers on some issues. It said that employees who currently are remote full time or only go to the office once a pay period can keep those schedules. And those who telework more than 200 miles away from their location will still be able to do so, as long as they can be in person when it’s required. A $375 annual stipend that was put in place during Covid to defray work-at-home costs will continue.
Workers also got their way on the issue of “community days,” where bosses can bring in the entire team at once. Gensler wanted them once every two weeks, but the panel agreed with the union’s suggestion that they be done quarterly. (Gilman was strongly opposed to the plan, referring to it as “community spread days.”)
Other details of the collective bargaining agreement, laid out in the union note, show some of the top-notch perks that the SEC workers receive. Here are a few of the new and improved benefits:
Student loans: the deal doubles, from $60,000 to $120,000, the lifetime cap the agency offers for federal student loan reimbursement. Under the SEC program workers can be repaid $10,000 a year; it includes some loans that parents can take out on behalf of their children’s education.
New “wellness” accounts: Workers can be reimbursed up to $1,000 annually for gym memberships, yoga classes or the purchase of exercise equipment (including running shoes).
New furniture: Employees have the option of getting a sit-stand desk “whenever a major office relocation occurs.”
Stepping back: The impasses panel held two days of mediation hearings over the telework issue and its opinion lays out some new – and notable – information on how the SEC handled the Covid crisis. Several agency managers, including from the enforcement and examinations divisions, testified that their operations suffered under full telework. Having nobody in the office “negatively affected the SEC’s culture, productivity, and fulfillment of the SEC’s mission,” the panel’s decision noted. “While the agency successfully maintained its operations during the emergency, it has determined that many tasks, which could be done virtually, are in fact more effectively performed in-person.”…(Thursday)
Another Credit Card Battle Brews: It’s hard to imagine that tensions between big banks and CFPB chief Rohit Chopra could get much higher, especially after the consumer watchdog released a surprisingly aggressive plan for capping credit card late fees earlier this month. But a new claim by the bureau that firms have been concealing card repayment data – and harming customers for years – has triggered an additional wave of apoplexy in the industry.
The CFPB brought the issue to the fore late last week when it sent a letter to JPMorgan Chase, Citigroup, Bank of America, Capital One, Discover and American Express, admonishing them for refusing to report customers’ “actual payment” information. That’s the amount of card debt is paid off each month, as opposed to the full amount or the minimum balance. The regulator told the banks they were “suppressing” the information, and keeping key data out of credit reports. As a result, consumers may be missing out on two major benefits:
Higher credit scores. The CFPB estimated that if the actual payments were reported, millions of scores might go up by 20 points or more. (However, the agency also conceded that the reverse could also be true, and some scores might go down.)
Lower interest rates. Access to the partial payment data, the CFPB argued, could encourage banks to poach customers from competitors by offering cards with better terms – a better deal for consumers.
The CFPB began its review in May, reaching out to the card companies with a list of questions. Last week’s letter was a sort of summation of the bureau’s findings. It noted that none of the firms had provided data on actual payments to a nationwide consumer reporting system since 2015. It pinned the blame on a fear of being put at a “competitive disadvantage.” Here’s a fairly accusatory line from the note, which was written by John McNamara, a principal assistant director in the CFPB’s division of research, monitoring and regulations:
“While our analysis did not seek to investigate whether entities explicitly colluded, the responses indicate that one large credit card company moved first, and other players suppressed data shortly thereafter. Whatever the impetus, the impact was the same: a rapid shift towards data suppression…limiting the competitive functioning of the market.”
Industry representatives were reluctant to discuss the CFPB effort on the record, but we were told that the American Bankers Association’s Card Policy Council will be taking the lead in coordinating any response. (The ABA declined to comment.) …(Wednesday)
Mutual Funds Very Unhappy: The SEC’s proposal to better protect mutual fund shareholders in times of market turmoil has sparked a vast outpouring of opposition from the industry. And it’s pretty clear that the SEC plan is the biggest regulatory fight that mutual fund firms have faced in a while. So they are bringing out the big guns – and using strong language that one doesn’t often see in the typically lawyerly comment letters filed with the agency. As Gregory Davis, chief investment officer of Vanguard, wrote, the policy “misses the mark” and “applies an ill-suited, one-size-fits-all approach across the large and diverse fund universe.” The SEC, he added, went ahead “without providing data to justify such a wholesale alteration of risk management and without considering the significant negative impact this proposal would have on investors.”
But a review of the comment file shows the regulator has garnered only minimal support from investor advocates. That’s especially true about its plan to require swing pricing and set a “hard close” for transactions. For example, both the Consumer Federation of America and Better Markets, which can usually be counted on to back Gensler’s regulatory moves, urged the commission to back away from the pricing mandate. Another liberal group, the Americans for Financial Reform Education Fund, said it favors the change but it acknowledged that “significant operational upgrades” at funds and retirement plan administrators would be needed.
Comments were due last week on the far-reaching proposal, which the SEC says responds to issues that cropped up as funds processed an unusually high number of redemptions during the Covid-induced volatility of March 2020. Swing pricing, which is used more frequently in Europe, is a way of penalizing shareholders for leaving, rather than forcing investors who stick around to absorb the costs. Having a hard stop for orders, usually by the 4 p.m. market close, is necessary to facilitate swing pricing. That is a big change to the current practice where trades can be sent to brokers or retirement plans by the close. They are then processed later in the day by the fund firms.
The SEC also proposed reforms on “liquidity risk management,” which are designed to make it easier to handle redemptions and ensure that there’s less dilution of investors’ holdings. The pro-investor organizations mostly back those reforms, though fund companies have strongly come out against them, as well.
Here are a few more critiques we’ve pulled out, now that most of the comments on the proposal are posted on the SEC’s web site:
BlackRock’s take: The world’s biggest asset manager said it cannot support the effort, which “contemplates a sweeping and complex set of reforms simultaneously that would affect thousands of funds and millions of investors.” The firm added that the changes “could deprive investors of access to valuable investment options and could negatively impact returns for long-term savers by requiring funds to manage liquidity to an unrealistic set of assumptions and by reducing the ability of managers to exercise the professional judgment that investors seek when investing in funds.”
Still, BlackRock was more supportive than most big fund managers of swing pricing, calling it “an effective tool for mitigating dilution.” It suggested that the SEC lead industry wide discussions to address the issues with instituting it in the U.S…(Tuesday)
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