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CAPITAL MARKETS REGULATION

Harvard Kennedy School / Harvard Law School

Course Syllabus, Spring Semester 2018

Wednesdays, 5-7pm

Law School Campus, 1563 Massachusetts Avenue

Instructors Professor Robert Glauber Office: Belfer 506, HKS Phone: (617) 495-4691 robert_glauber@harvard.edu

Professor Hal Scott Office: Lewis 339, HLS Phone: (617) 495-4590 hscott@law.harvard.edu

Faculty Assistants For Professor Robert Glauber: Assistant: Minoo Ghoreishi Phone: (617) 384-7329 minoo_ghoreishi@harvard.edu

For Professor Hal Scott: Assistant: Steve Wagner Phone: (617) 496-2036 swagner@law.harvard.edu

Office Hours Professor Robert Glauber Wednesdays, 2:o0pm-4:00pm, Or preferably by appointment

For Professor Hal Scott: By Appointment

Course Assistant

Jennifer Klein (jklein@jd19.law.harvard.edu)

Class Schedule

Class # Date Topic Speaker

1 1/24 Introduction Glauber, Scott

2 1/31 Lender of Last Resort and Systemic Risk Scott

3 2/7 Capital and Liquidity Kuritzkes

4 2/14 Resolution Roe

5 2/21 Activity Restrictions & Too Big to Fail Glauber

6 2/28 Derivatives and Clearing Massad

7 3/7 Enforcement Avakian

8 3/21 GSE Reform and Housing Wallison

9 3/28 Equity Market Structure Angel

10 4/6 Shadow Banking Piwowar

11 4/11 Regulatory Structure Glauber

12 4/18 Cost Benefit Analysis Scott

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Mission Statement

I. Analyze current U.S. government policy on issues relating to: a. Financial Institutions; b. Regulation; and c. Capital Markets

II. Debate the formulation, implementation, and impact of regulatory policy on the capital markets and the financial system, emphasizing current issues. III. Enrich classroom discussion with guest speakers.

Course Overview

This course examines important current issues in the regulation of the U.S. capital markets, with emphasis on the recent financial crisis, reform efforts thus far, and potential future actions. The class will be primarily one of discussion rather than lecture. As noted in the syllabus, we will have regular guest speakers. This course does not have any prerequisites and there is not an expectation that students will have prior professional or academic work in this field. A useful resource for students with no exposure to any of these topics is the website of MIT Sloan Professor Simon Johnson (http://baselinescenario.com/financial-crisis-for-beginners/).

Grading

There will be a take-home open book final exam that will count for 75% of your grade; the remaining 25% will be based on participation in class discussions.

Participation

After the end of the add-drop period, panels of approximately 8-10 students will be designated for each class. Members of that panel will be expected to lead discussion in their assigned class and, as a group, to have full command of all readings for the class, including optional readings. For other class meetings, each panel should also coordinate among themselves to make sure that at least one member in each group has read each of the optional readings, in addition to the required readings. All students should feel free to participate in each class discussion.

Reading Material

Readings will be available on the course website in digital format only. It will not be available in hard copy. On the syllabus, all required readings are marked with an asterisk (*). All other readings are optional.

Harvard students can log on to the course website with their Harvard University ID and PIN at: canvas.harvard.edu. Students that are not yet enrolled will have to email Steve Wagner directly at swagner@law.harvard.edu to gain access to the reading materials.

Non-Harvard students should contact Steve Wagner: swagner@law.harvard.edu to find out how to gain access to the course website (access protocol varies according to originating school).

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Class 1 - Introduction January 24

Economic literature suggests a number of possible rationales for financial regulation, including: externalities (such as systemic risk), information asymmetries, consumer protection (e.g. deposit insurance), principal-agent problems, maintenance of competition, and limitation of moral hazard due to government supports. But financial regulation needs to be both justified by such rationales and also effective. Some dimensions of effectiveness might include efficiency and economy; a role for management in assuring regulatory compliance; proportionality to require that restrictions on firms and market behavior be in proportion to expected benefits to consumers and industry; international harmonization of regulation; and the avoidance of unnecessary distortions or impediments to competition. The Dodd-Frank Act of 2010 is the most recent and in many dimensions an extraordinarily sweeping regulatory intervention into the financial markets. The course will focus in many sessions on various dimensions of this Act’s interventions and seek to evaluate the effectiveness of this legislation. The first class will provide an introduction in the concepts underlying financial regulation and an introduction to the Dodd-Frank Act and an overview of recent. It will also discuss the implications of financial regulation for the competitiveness of U.S. capital markets. Introduction to Capital Markets Regulation in the U.S.

*Murphy, E. “Who Regulates Whom and How? An Overview of the U.S. Financial Regulatory Policy for Banking and Securities Markets,” Cornell University ILR School, May 28, 2013. Summary & pp.1-14 (required), 15-51 (optional). Scott, H. & Gelpern, A., International Finance: Transactions, Policy and Regulation, 21st Edition, Foundation Press, 2016 (pp. 100-143). * U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Capital Markets,” Report, October 2017 (pp. 171-186). Principles of Regulation

*Committee on Capital Markets Regulation, “Global Financial Crisis: A Plan for Regulatory Reform,” May 2009 (pp.27-32). Brunnermeier, B., et. al,. “The Fundamental Principles of Financial Regulation,” International Center for Monetary and Banking Studies, Geneva Reports on World Economy, Preliminary Conference Draft, 2009 (pp.1-10).

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*DiGiorgio, G., DiNoia, C. & Piatti, L., “Financial Market Regulation: The Case of Italy and a Proposal for the Euro Area,” Wharton Financial Institutions Center, June 2000 (pp.3-10). Overview of the Dodd-Frank Act

* Davis Polk, “Dodd-Frank’s Seventh Anniversary”, July 2017, (pp.1-2). * U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions,” Report, June 12, 2017 (pp. 32-34). *Frank, B., “Assessing the Impact of the Dodd-Frank Act Four Years Later”, Testimony before the House Committee on Financial Services, July 2013 (pp.3-8). *Scott, H., “Dodd-Frank’s Panic Problem,” Politico, August 6, 2013 (pp.1-2). Davis Polk, “Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” July 21, 2010, (pp.1-130). [This summary will be a useful reference, particularly for the first half of the course.] Competitiveness of U.S. Capital Markets

*Committee on Capital Markets Regulation, “Interim Report of the Committee on Capital Markets Regulation,” November 30, 2006 (pp.1-7). *Committee on Capital Markets Regulation, “U.S. Public Equity Markets are Stagnating,” Report, April 2017 (pp.6-15). *Scott, H., “Shareholders Deserve Right to Choose Mandatory Arbitration," Columbia Law School Blue Sky Blog, August 21, 2017 (pp.1-2). Staff, “Reinventing the Company,” The Economist, October 2015 (pp1-3). Staff, “Hong Kong’s Stock Exchange Proposes a Controversial Reform,” The Economist, June 2017 (pp1-3). U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Capital Markets,” Report, October 2017 (pp. 21-40).

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Class 2 – Systemic Risk and Lender of Last Resort January 31

One of the central features of the recent financial crisis was the fear of systemic risk. Following the failure of Lehman Brothers, many believed that the subsequent failure of any large, interconnected financial institution would have devastating impacts on the financial system. An alternative view is that the primary danger comes from contagion runs rather than the interconnectedness of firms causing cascading bankruptcies. The Federal Reserve has traditionally been the lender of last resort for the financial system, primarily through the discount window. During the financial crisis, the Fed created new lending programs, for both banks and non-banks, and greatly expanded its balance sheet to inject additional liquidity into the financial market. Dodd-Frank significantly pared back its powers to act as lender of last resort. This class will focus on an overview of systemic risk as a concept, how it manifested itself in the 2008 financial crisis, and the Fed’s role as lender of last resort. Overview

Taylor, J., “Systemic Risk and the Role of Government,” Keynote Speech, Conference on Financial Innovation and Crises, Federal Reserve Bank of Atlanta, May 12, 2009 (pp. 1-7). *Scott, H., Connectedness and Contagion, 2016 (pp.xv-xxi). Scott, H. & Johnson, B., “Controlling the Long-Term Problems of Short-Term Funding,” Harvard Public Law Working Paper No. 17-13, May 25, 2017 (pp.3-15). Correlation, Connectedness, and Contagion

*Scott, H., Connectedness and Contagion, 2016 (pp.9-24, 41-47, 67-78). Bank of England, “Banking Sector Interconnectedness: what it is, how we can measure it and why it does matter,” Quarterly Bulletin, Q2, 2015, (pp. 1-9). Geithner, T., “Congressional Testimony on AIG,” Reprinted by Wall Street Journal, March 24, 2009 (pp. 1-4). Burne, K., “New Worry in ‘Repo’: Just One Bank for $3.5 Trillion Market,” The Wall Street Journal, August 30, 2017 (pp. 1-3). Ball, L., “The Fed and Lehman Brothers,” NBER Working Paper No. 22410, July 2016 (pp.1-13). Current Regulation of Systemic Risk

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*Financial Stability Oversight Council, “2016 Annual Report,” June 21, 2016 (pp. 3-6, 7-18). U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Capital Markets,” Report, October 2017 (pp. 151-167). Financial Stability Board, “2016 update of lists of global systemically important banks” (G- SIBs),” November 21, 2016 (pp. 1-3). Financial Stability Board, “2016 update of lists of global systemically important insurers (G- SIIs),” November 21, 2016 (p. 1-3). Gray, A., “AIG sheds $150m in costs along with Sifi label,” Financial Times, October 1, 2017 (pp. 1-2). Lender of Last Resort

*Scott, H., Connectedness and Contagion, 2016 (pp.93-107). Scott, H., Meltzer, A., Hubbard, R., Holtz-Eakin, D., & Calomiris, C., “Establishing Credible Rules for Fed Emergency Lending.” Journal of Financial Economic Policy, 2017 (pp.1-12). Carlson, M. & Wheelock, D., “The Lender of Last Resort: Lessons from the Fed’s First 100 Years,” Research Division, Federal Reserve Bank of St. Louis, Working Paper #2012-056B, February 2013 (pp. 1- 43). Lacker, J., “The Fed as a Lender of Last Resort: Comments on “Rules for a Lender of Last Resort,” May 30, 2014 (pp.1-4). Eavis, P., “New Fed Rule Limits Emergency Lending Power,” New York Times, November 30, 2015, (p.1-4) Bernanke, B., “Warren-Vitter and The Lender of Last Resort,” Ben Bernanke’s Blog, Brookings, May 15, 2015. *“H.R. 10 — 115th Congress: Financial CHOICE Act of 2017, §1008” April 26, 2017. Board of Governors of the Federal Reserve System, Regulation A--Extension of Credit by Federal Reserve Banks (Docket No: R-1476), November 30, 2015.

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Class 3 – Capital and Liquidity

February 7

Capital requirements have become an integral feature of the safety and soundness regulatory regime for financial institutions. While capital requirements are designed to decrease the probability of failure for institutions, the financial crisis led many to conclude that existing requirements were insufficient. The international Basel III reforms that are currently being implemented have not only significantly increased minimum capital requirements, but have also placed greater emphasis on the types of capital that qualify for regulatory purposes, imposed new liquidity requirements and layered on additional requirements for systemically important institutions. Evaluating these changes, some have argued that the new capital requirements are overly burdensome and complex; others maintain that the increased capital levels will come at a significant cost, increasing borrowing costs, and also potentially harming future GDP growth. This class will examine the role of capital requirements in financial regulation, the Basel III reforms, and the costs and benefits of higher capital levels and new liquidity requirements. Guest Speaker

Mr. Andrew Kuritzkes, Executive Vice President and Chief Risk Officer, State Street Corporation Mr. Kuritzkes is responsible for leading State Street Corporation’s risk management function globally. He is also a member of State Street’s Management Committee, the company’s most senior strategy and policy-making team. Prior to joining State Street in 2010, Mr. Kuritzkes was a partner of Oliver Wyman and led the firm’s public policy practice in North America. He was a managing director in the firm’s London office from 1993 to 1997, and served as vice chairman of Oliver, Wyman & Company globally from 2000 until the firm’s acquisition by MMC in 2003. From 1986 to 1988, he worked as an economist and lawyer for the Federal Reserve Bank of New York. Mr. Kuritzkes serves as a member of the Financial Research Advisory Committee of the US Treasury’s Office of Financial Research. He is also a member of the Financial Advisory Roundtable of the Federal Reserve Bank of New York, and is a member of the US Committee on Capital Markets Regulation. Mr. Kuritzkes holds a Juris Doctor degree from Harvard Law School, a Master of Philosophy degree in economics from Cambridge University and a Bachelor of Arts degree from Yale College. Capital Requirements

*Scott, H., Connectedness and Contagion, 2016 (pp.174-181).

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*Scott, H., “Stress Tests: Restore Compliance with the APA,” September 7, 2017 (pp. 1-5). *Board of Governors of the Federal Reserve System, “Federal Reserve Board requests comment on package of proposals that would increase the transparency of its stress testing program,”, December 7, 2017 (pp. 1-2). Heltman, J., “Fed opens black box on stress tests (but not too far),” American Banker, December 7, 2017 (pp. 1-2). Committee on Capital Markets, “The Administrative Procedure Act and Federal Reserve Stress Tests: Enhancing Transparency,” September 2016 (pp. 1-10). *Admati, A., “The Missed Opportunity and Challenge of Capital Regulation,” National Institute Economic Review, Vol. 235, Issue 1, February 2016 (pp.4-14). *Scott, H., “To Grow, First Free the Banks,” The New York Times, May 17, 2017 (pp. 1-3). * U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions,” Report, June 12, 2017 (pp. 37-55, 124). *Marlin, S., “Fed’s Outgoing CCAR Chief Defends Stress Tests,” Risk.net, October 5, 2017 (pp.1-7). Tarullo, D., “Departing Thoughts,” Remarks at The Woodrow Wilson School, Princeton University, April 4, 2017 (pp.8-25). Brookings Institution, “Strengthening and Streamlining Bank Capital Regulation,” BPEA Conference Drafts, September 7, 2017 (pp. 1-48). Warmbrodt, Z., “Senators reach rare bipartisan deal to ease banking rules,” Politico, November 13, 2017 (pp. 1-2). Liquidity Requirements

*Nelson, W., “Living Wills: The Biggest Liquidity Rule of Them All,” American Banker, May 24, 2016 (pp. 1-3). *Scott, H., Connectedness and Contagion, 2016 (pp.183-188). *Heltman, J., “Long-Term Liquidity Plan Is Costly and Redundant, Banks Argue,” American Banker, August 12, 2016 (pp. 1-3). Hamilton Place Strategies, “Large Banks: Safe and Sound,” July 2017, (pp. 1-21).

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Tarullo, D., “Liquidity Regulation,” Remarks at The Clearing House 2014 Annual Conference, November 20, 2014 (p.1-20). Capital Standards

*Basel Committee on Banking Supervision, “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems,” Revised version: June 2011 (pp. 1-11). *Basel Committee on Banking Supervision, “Twelfth Progress Report on Adoption of the Basel Regulatory Framework,” April 2017 (pp.1-4). *Basel Committee on Banking Supervision, “High-level summary of Basel III reforms,” December 2017 (pp. 1-12). *Board of Governors of the Federal Reserve System, Final Rule- Implementation of Capital Requirements for Global Systemically Important Bank Holding Companies, December 9, 2016. (pp. 1) *Board of Governors of the Federal Reserve System, “Agencies Adopt Enhanced Supplementary Leverage Ratio Final Rule and Issue Supplementary Leverage Ratio Notice of Proposed Rulemaking” Press Release, April 8, 2014. *Board of Governors of the Federal Reserve System, “Federal Reserve Board releases results of supervisory bank stress tests,” Press Release, June 22, 2017. *Scott, H., “The Trump Administration—Not the Fed—Has It Right on Bank Regulation,” CNBC, July 3, 2017 (pp. 1-2). U.S. Government Accountability Office, “Initial Effects of Basel III on Capital, Credit, and International Competitiveness,” November 2014. Banerjee, R. and Mio, H., “The Impact of Liquidity Regulation on Banks,” Bank for International Settlements, BIS Working Papers No. 470, October 2014 (pp.1-4). Groendahl, B. and Brush, S., “France Holds Out as Bank Regulators Drive for Basel Overhaul,” Bloomberg, June 12, 2017 (pp. 1-3). Haldane, A., “The Dog and the Frisbee,” Speech delivered at the Federal Reserve

Bank of Kansas City’s 366th Economic Policy Symposium, Jackson Hole, WY, August 31, 2012 (pp. 1-34). Groendahl, B., “Fed Nominee Quarles Seen Breaking Ice in Basel Rule Standoff,” Bloomberg, October 4, 2017 (pp. 1-2).

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Class 4 – Resolution February 14

While the Federal Deposit Insurance Corporation (FDIC) has traditionally been in charge of “resolving” failing depository banks, other financial institutions have been subject to the normal bankruptcy process. During the financial crisis many argued that these existing procedures were inadequate for resolving large, interconnected bank holding companies and non-bank financial institutions, and thus led to the requirement of injecting public funds, most prominently through TARP. This class will examine the operation by the FDIC, pursuant to Dodd-Frank, of new resolution procedures for systemically important institutions (most recently the “single- point of entry” procedure) and whether these procedures have solved the “too big to fail” problem. Guest Speaker

Mr. Mark Roe Mark J. Roe is a professor at Harvard Law School, where he teaches corporate law and corporate bankruptcy. Single Point of Entry (SPOE) & Orderly Liquidation Authority (OLA)

Simmons, R., “Single Point of Entry Strategy,” Banking Perspective, Quarter 1 2014, Clearing House (pp.36-43). Federal Deposit Insurance Corporation, “Resolution of Systemically Important Financial Institutions: The Single Point of Entry Strategy,” FDIC Federal Register, Volume 78, No. 243, December 18, 2013 (pp. 76614-76624). * Davis Polk, “Hypothetical Single Point of Entry Resolution of U.S. Bank Holding Company Under the U.S. Federal Bankruptcy Code,” (pp.12-18). Fuchs, J., “From Bailouts to Bail-ins: Will the Single-Point-of-Entry Concept End "Too Big To Fail,” Central Banker, Summer 2013. *Scott, H., Connectedness and Contagion, 2016 (pp. 205-218). *Roe, M., & Gordon, J., “Financial Scholars Oppose Eliminating ‘Orderly Liquidation Authority’ As Crisis-Avoidance Restructuring Backstop,” May 23, 2017 (pp. 1-7). *U.S. Department of the Treasury, “Workshop on SIFI Resolution- Orderly Liquidation Authority,” August 15, 2017 (pp.22-35). Use of Bankruptcy Procedure

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*U.S. Department of the Treasury, “Workshop on SIFI Resolution- SPOE Under Proposed Bankruptcy Code Amendments- Financial Institutions Bankruptcy Act,” August 15, 2017 (pp.75-87, 62-63). *McCracken, J., “Lehman's Chaotic Bankruptcy Filing Destroyed Billions in Value,” The Wall Street Journal, December 29, 2008 (pp. 1-2). Taylor, J. “Testimony on the Financial Institution Bankruptcy Act,” March 23, 2017, (pp. 1-14). Pellerin S. & Walter, J., “Orderly Liquidation Authority as an Alternative to Bankruptcy,” Economic Quarterly, Volume 98, Number 1, 2012 (pp. 1-5, 1o19). House Financial Services Committee, “The Dodd-Frank Act and the Persistence of “Too Big To Fail,” 2014 (pp.1-9). Bater, J. “Yellen at Odds with GOP on Resolving Failing Banks,” Bloomberg, February 20, 2017 (pp.1-2). Living Wills

*Scott, H., Connectedness and Contagion, 2016 (pp.219-222). *Jopson, B., “US Rejects ‘Living Wills’ of Five Banks,” Financial Times, April 13, 2016 (pp. 1-2). * U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions,” Report, June 12, 2017 (pp. 66-68, 130). *Tracy, R., & Glazer, E., “Wells Fargo Sanctioned by U.S. Regulators for ‘Living Will’ Deficiencies,” The Wall Street Journal, December 13, 2016 (pp. 1-2). SIFMA, “Rebalancing the Financial Regulatory Landscape- Living Wills,” May 1, 2017 (pp. 94-102). Board of Governors of the Federal Reserve System, “December 2016 Letter to Wells Fargo,” December 13, 2016 (pp. 1-11). *Scott, H., “Publish the Secret Rules for Banks’ Living Wills,” The Wall Street Journal, June 10, 2016 (pp. 1-2) Total Loss-Absorbing Capacity (TLAC)

Financial Stability Board, “Guiding Principles on the Internal Total Loss-

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absorbing Capacity of G-SIBs (‘Internal TLAC’),” July 6, 2017 (pp. 1-29). Federal Reserve Board of Governors, “Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company,” Final Rule, December 15, 2016 (pp. 4-28). Derivatives Contracts

*U.S. Department of the Treasury, “Workshop on SIFI Resolution- Prevention of QFC Close-outs,” August 15, 2017 (pp.56-58). Hamilton, J., “Fed Demands Wall Street Protections Against Lehman-Like Runs,” Bloomberg, September 1, 2017 (pp. 1-4).

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Class 5- Activity Restrictions and Too Big To Fail February 21

Former Federal Reserve Chairman Paul Volcker has argued over the course of the past several years that commercial banks, with access to the “safety net” of deposit insurance and the Fed discount window, should be restricted from engaging in proprietary and speculative activities. This proposal, which was dubbed the “Volcker Rule”, was included in Dodd-Frank and has been implemented by a new joint-agency rulemaking. However, many observers claim that distinguishing propriety trading from permissible market making, underwriting, and hedging will be complex and onerous. The U.K. has also proposed structural reforms, but instead would require retail deposit-taking institutions to be in a separate subsidiary, or ring-fenced, from investment banks with higher standalone capital requirements. This class will examine these efforts to restrict activities and their impact on the financial system. The class will also evaluate whether large, systemically important financial institutions were “too big to fail” (TBTF) during the recent financial crisis, whether they still are, and analyze the implications of TBTF for future regulatory policies. Volcker Rule

* U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions,” Report, June 12, 2017 (pp. 71-78, 132-133). *McLannahan, B., “Big Six US Banks Add $170bn to trading firepower,” Financial Times, December 3, 2017 (pp. 1-2). Bubb, R., & Kahan, M., “Regulating Motivation: A New Perspective on the Volcker Rule,” August 3,2017 (pp. 1-43). Federal Reserve, Commodities Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency, Securities and Exchange Commission (SEC), “Final Rules to Implement the ‘Volcker Rule’,” Fact Sheet, December 10, 2013 (pp. 1-3). Committee on Capital Markets Regulation, “Applying the Volcker Rule,” Statement issued February 18, 2014. *SIFMA, “Rebalancing the Financial Regulatory Landscape- The Volcker Rule,” May 1, 2017 (pp. 78-93). Volcker, P., “Prohibiting Certain High-Risk Investment Activities by Banks and Bank Holding Companies,” Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C., February 2, 2010 (pp. 1-5).

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*Scott, H., “Implications of the Volcker Rules for Financial Stability,” Testimony before the Committee on Financial Services, U.S. House of Representatives, June 16, 2011 (pp. 3-7). *Schacht, K., “Volcker vs. Vickers – Which Plan Is Best for Banks?,” CFA Institute, May 1, 2013 (pp. 1-3). *Oliver Wyman, “The Volcker Rule Restrictions on Proprietary Trading – Implications for Market Liquidity,” February, 2012 (pp. 2-6). *Raice, S. and Schlesinger, J., “Fed Governor Jerome Powell Calls for Volcker Rule Review,” Wall Street Journal, January 7, 2017 (pp.1-3). *Madigan, P., “Volcker Fights Back as Prop-Trading Ban Comes Under Attack,” Risk, April 19, 2017 (pp.1-9). *SIFMA, “Rebalancing the Financial Regulatory Landscape,” May 1, 2017 (pp.78-91). Glass-Steagall

*Scott, H., “The White House and Lawmakers Want to Reinstate a 1930s Law They Don’t Understand,” The Washington Post, July 12, 2017 (pp.1-3). Committee on Capital Markets Regulation, “Nothing But the Facts: The Glass-Steagall Act,” August 2017 (pp. 1-9). *Warren, E., “Senators Warren, McCain, Cantwell and King Introduce 21st Century Glass-Steagall Act,” April 6, 2017 (pp. 1-2). Warren, E., McCain, J., Cantwell, M. and King, A., “We Need to Rein in ‘Too Big To Fail’ Banks,” CNN, July 2014 (pp.1-2). Too Big To Fail (TBTF)

*Berry, J., “The Great Too-Big-To-Fail Debate,” The Magazine of International Economic Policy, Spring 2016 (pp.46-49). Barth, J. & Prabha, A., “Too-Big-to-Fail: A Little Perspective on a Large Problem,” from the Fifteenth Annual International Banking Conference, Federal Reserve Bank of Chicago, Chicago, IL, November 15–16, 2012 (pp. 5-17). Stewart, J. and Eavis, P., “Revisiting the Lehman Brothers Bailout that Never Was,” New York Times, September 29, 2014 (pp.1-5). Wallison, P., “Breaking Up the Big Banks: Is Anybody Thinking,” American

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Enterprise Institute for Public Policy Research, Financial Services Outlook, August-September, 2012 (pp. 1-6). Brainard, L., “Dodd-Frank at Five: Assessing Progress on Too Big to Fail,” Speech, July 9, 2015 (pp.2-8,11-13). Bipartisan Policy Center, “The Big Bank Theory: Breaking Down the Breakup Arguments,” October 2014 (pp.5-7, 19-26). Evans, L., “Large Bank Holding Companies: Expectations of Government Support,” Testimony Before the Subcommittee on Financial Institutions and Consumer Protection, Committee on Banking, Housing and Urban Affairs, July 31, 2014 (pp.5-10). Afonso, G., et al, “What Do Rating Agencies Think About Too Big-To-Fail Since Dodd-Frank?,” Liberty Street Economics Blog, June 29, 2015, (pp.1-3). Goodhart, C., et al, “Critical Reflections on Bank Bail-Ins,” Journal of Financial Regulation, February, 2015 (pp.12-20). Scott, H. & Gelpern, A., International Finance: Transactions, Policy and Regulation, 21st Edition, Foundation Press, 2016 (pp.310-328). Financial Crisis Inquiry Commission, “Governmental Rescues of ‘Too Big to Fail’ Financial Institutions,” Preliminary Staff Report, August 31, 2010 (pp. 3-4). Farrell, M. “Goldman Says J.P. Morgan Could Be Worth More Broken Up,” Wall Street Journal, January 5, 2015 (pp. 1-2). Dexheimer, E., “Bipartisan Bank-Relief Bill Wins Approval From Senate Panel,” Bloomberg, December 6, 2017 (pp. 1-2).

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Class 6 – Derivatives and Clearing February 28

Derivatives are financial instruments whose value is derived from some other underlying security or commodity. While some derivatives (futures and options) trade on exchanges, most trade in the largely unregulated over-the-counter (OTC) market. Since the passage of the Commodities Futures Modernization Act (CMFA) in 2000, this market has grown from a total notional value of $88 trillion in 1999 to nearly $700 trillion in 2014. Reforming the derivatives market became a significant area of focus after the financial crisis, both because of the role derivatives (credit default swaps specifically) played in the failure of AIG, and the perception that derivatives exposures at many large financial institutions increased their interconnectedness and systemic risk. This class will examine the role of derivatives in the financial system; what, if any, regulatory oversight they should be subject to; and the regulatory reforms that are underway in the U.S. and Europe. Guest Speaker

Mr. Timothy G. Massad Mr. Massad was Chairman of the Commodity Futures Trading Commission from June 5, 2014 – January 20, 2017. Previously, Mr. Massad was the Assistant Secretary for Financial Stability at the U.S. Department of the Treasury. In that capacity, Mr. Massad oversaw the Troubled Asset Relief Program (TARP). Prior to joining Treasury, Mr. Massad served as a legal advisor to the Congressional Oversight Panel for TARP, under the leadership of (now Sen.) Elizabeth Warren. Prior to his government service, Mr. Massad was a partner in the law firm of Cravath, Swaine & Moore, LLP. Mr. Massad had a broad corporate practice with a focus on corporate finance and financial markets. He helped to draft the original standardized agreements for swaps and helped many businesses negotiate and execute transactions to hedge exposures in the derivatives markets. Mr. Massad earned his bachelor’s and law degrees at Harvard. Derivatives Regulation

U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Capital Markets,” Report, October 2017 (pp. 109-125). *Commodities Futures Trading Commission and Securities and Exchange Commission, “Joint Report on International Swap Regulation,” January 31, 2010 (pp. 1-5, 10-14). *Financial Stability Board, “OTC Derivatives Market Reforms: Twelfth Progress Report on Implementation,” June 29, 2017 (pp.1-4). Stout, L., “Regulate OTC Derivatives By Deregulating Them,” Regulation, Vol. 32,

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No. 3, Fall 2009, (pp. 30-41). *Federal Reserve, et al, “Agencies Finalize Swap Margin Rule,” Press release, October 30, 2015 (pp.1). *Committee on Capital Markets Regulation, “Nothing But The Facts: The Swaps Pushout Rule,” Fact Statement, March 16, 2015 (pp.3). *Heltman, J., “Regulators Cut Big Banks a Break in Final Swaps Rule,” American Banker, October 22, 2015 (pp.1-3). Variation Margin and Capital Requirements

Clancy, L. “UBS saves SFr295m in Capital Via Swaps Margin Change,” Risk.net, August 4, 2016 (pp. 1-3). Board of Governors of the Federal Reserve System, “Regulatory Capital Treatment of Certain Centrally Cleared Derivative Contracts Under Regulatory Capital Rules,” August 14, 2017 (pp.1-3). Davis Polk, “U.S. Banking Agencies Clarify Capital Treatment of Cleared Derivatives with Settled-to-Market Variation Margin,” August 21, 2017 (pp. 1-7). OTC Derivatives Market Overview

*Bank for International Settlements, “Semiannual OTC derivatives statistics: Table D5- Global OTC derivatives market” September 17, 2017 (p. 1). *U.S. Commodity Futures Trading Commission, Selected Financial Data for Futures Commission Merchants (FCMs) and Retail Foreign Exchange Dealers (RFEDs), August 31, 2017 (p.1). Swap Execution Facilities (SEF), and Equivalence

*Wright, J., “Industry Pushes CFTC to Prioritise Cross-Border Clarity,” Risk.net, August 30, 2017 (pp.1-6). Rubin, G., “CFTC, EU Reach Swaps Agreements as New European Rules Loom,” Wall Street Journal, October 13, 2017 (pp. 1-2). *Weber, A. & Bain, B., “Trans-Atlantic Swaps Deal Reached to Avert MiFID Market Threat,” Bloomberg BNA, October 16, 2017 (pp.1-2). Clearing Houses

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*Bank for International Settlements, “Analysis of Central Clearing Interdependencies,” July 5, 2017 (pp. 1-3). Pirrong, C., “The Economics of Central Clearing: Theory and Practice,” International Swaps and Derivatives Association Discussion Papers Series, No. 1 – May 2011 (pp. 5-17). U.S. Department of the Treasury, “FSOC Makes First Designations in Effort to Protect Against Financial Crises,” Press Release, July 18, 2012 (pp. 1-2). Duffie, D., Li, A. & Lubke, T., “Policy Perspectives on OTC Derivatives Market Infrastructure,” Federal Reserve Bank of New York Staff Report No. 424, March 2010 (pp. 1-9). Mitting, W., “OTC Clearing III: How Many CCPs Will There Be and How Can They Compete?,” Futures & Options World, April 30, 2012 (pp. 1-2). *Cohn, G., “Clearing Houses Reduce Risk, They Do Not Eliminate It,” Financial Times, June 22, 2015 (pp.1-2). *CFTC, “The United States Commodity Futures Trading Commission and the European Commission: Common approach for transatlantic CCPs,” February 10, 2016 (pp. 1-5). Burne, K., “Large Banks Backing New Safeguards in Short-Term Lending Markets,” The Wall Street Journal, October 9, 2014 (pp.1-2). Blackrock, “Central Clearing Counterparties and Too Big To Fail,” April 2014 (pp.1-5). *Price, M., “Capital rules 'exacerbating' clearing house risks -CFTC commissioner,” Business Insider, October 17, 2017 (pp. 1-2). Tucker, P., “Are Clearing Houses the New Central Banks,” Over-the-Counter Derivatives Symposium, Chicago, April 11, 2014 (pp.1-12). *Bank for International Settlements, “Final Report: Resilience of Central Counterparties (CCPs): Further Guidance on the PFMI,” July 2017 (pp. 1-4). Resolution

*Wright, J., “US Treasury Hands CCP Resolution Powers to FDIC,” Risk.net, October 12, 2017 (pp. 1-6). *J.P. Morgan, ”Aligning Incentives Through Financial Resources for Effective CCP Resilience, Recovery, and Resolution,” May 2017 (pp. 1-8).

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*Wright, J, “Bailout Obsession Holds Back US CCP Resolution Regime,” July 25, 2017 (pp. 1-9). *Campbell, A., “Twin Member Default Would Hit Up to 23 CCPs,” Risk.net, July 5, 2017 (pp. 1-3). Brexit

*ISDA, “Brexit: CCP Location and Legal Uncertainty,” August 2017 (pp. 1-8). *Stafford, P., “Europe Nears Decision on Base for Euro Clearing,” Financial Times, May 18, 2017 (pp.1-3). Global Risk Regulator, “Stakes Rise in the Battle for Euro Clearing,” May 2017 (pp. 1-6). Clancy, L., “CCPs and Brexit: Don’t Forget the Rest of the World,” Risk.net, July 1, 2016 (pp.1-8). Wright, J., “US Dealers Wade into European CCP Relocation Debate,” Risk.net, June 22, 2017 (pp. 1-3).

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Class 7- Enforcement March 7

The enforcement of securities laws takes both public and private forms. The Securities and Exchange Commission’s Division of Enforcement conducts investigations into possible violations of the federal securities laws, and litigates civil enforcement proceedings in the federal courts and in administrative proceedings. Private enforcement may occur through securities class actions, or, more recently, through mandatory arbitration of shareholder claims.

Guest Speaker

Stephanie Avakian Stephanie Avakian was named Co-Director of the U.S. Securities and Exchange Commission’s Division of Enforcement in June 2017, after serving as Acting Director since December 2016. She was previously the Division of Enforcement’s Deputy Director, serving from June 2014 to December 2016. Before being named Deputy Director, Ms. Avakian was a partner at Wilmer Cutler Pickering Hale and Dorr LLP, where she served as a vice chair of the firm’s securities practice and focused on representing financial institutions, public companies, boards, and individuals in a broad range of investigations and other matters before the SEC and other agencies. Ms. Avakian previously worked in the Division of Enforcement as a branch chief in the SEC’s New York Regional Office, and later served as counsel to former SEC Commissioner Paul Carey. Public

*Michaels, D., “No Law Needed on Insider Trading, SEC Chief Says,” Wall Street Journal, September 6, 2017 (pp. 1-4). *Randazzo, S., “Jesse Litvak, A Symbol of the Government Crackdown on Wall Street, Goes on Trial Again,” Wall Street Journal, January 3, 2017 (pp. 1-4). *Noonan, L., “Customer reporting failures top big bank fines,” Financial Times, March 27, 2016 (pp. 1-3). *Silverman, G., “NYPD gains from fines paid by European banks,” Financial Times, June 5, 2016 (pp. 1-3). *Viswanatha, A., “Bank of America Penalty Thrown Out in Crisis-Era ‘Hustle’ Case,” Wall Street Journal, May 23, 2016 (pp. 1-3).

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*Koenig, A., “Look Who’s Getting That Bank Settlement Cash,” Wall Street Journal, August 28, 2016 (pp. 1-3). *Burne, K., “Bank Legal Costs Cited as Drag on Economic Growth,” Wall Street Journal, October 20, 2016 (pp. 1-3). *Cleary Gottlieb, “Supreme Court Clarifies Insider Trading Liability for Confidential Tips,” December 7, 2016 (pp. 1-4). *Bain, B., “SEC Weighs Curbing Investigators’ Powers to Probe Wall Street,” Bloomberg, February 20, 2017 (pp. 1-2). *Michaels, D., “SEC’s Use of In-House Courts Unconstitutional, Appeals Court Rules,” Wall Street Journal, December 28, 2016 (pp. 1-3). *Turk, M., “Regulation by Settlement,” University of Kansas Law Review Volume 66, 2017 (pp. 1-5) Private

Scott, H., & Silverman, L., “Stockholder Adoption of Mandatory Individual Arbitration for Stockholder Disputes,” Harvard Journal of Law and Public Policy Volume 36, 2013 (pp. 1188-1226). *Heltman, J., “Trump signs resolution killing CFPB arbitration rule,” American Banker, November 1, 2017 (pp. 1-2). Hayashi, Y., “CFPB Official Sues Trump Administration Over Agency Leadership,” Wall Street Journal, November 26, 2017 (pp. 1-2). *Webber, D., “Shareholder Litigation Without Class Actions,” Arizona Law Review Volume 57:1, January 1, 2015 (pp. 201-217). *Cornerstone Research, “Securities Class Action Filings: 2016 Year in Review,” January 31, 2017 (pp. 1-2).

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Class 8 – GSE Reform and Housing

March 21

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that were created by Congress to increase liquidity in primary and secondary mortgage markets as well as to supply capital for residential housing loans. Over time, the marketplace inferred an implicit government guarantee on GSE securities, providing these agencies with a lower cost of capital relative to other financial institutions. Because of this funding advantage, the GSEs grew dramatically in size to become some of the largest financial institutions in the world. The market expectation of a government guarantee proved mostly correct when the institutions were placed into conservatorship in early September 2008; their debt was in effect guaranteed by the government, although both the preferred and common equity were not. The issue is now what to do with these two giant mortgage institutions under direct government control, including how to use them to help ameliorate the foreclosure crisis, how to recoup taxpayer assistance, and since the Dodd-Frank Act did not touch on these institutions, how to reform them as part of a greater goal of redesigning the U.S. system of housing finance. The issue of reform of the GSEs is the most polarizing and unresolved problem from the financial crisis and will be a fiercely fought political battle in the coming years. We will discuss Fannie and Freddie before the crisis, how the financial crisis affected them and the decision to place them into conservatorship, what has occurred while they are under conservatorship and their current regulation, and finally, some of the proposals for GSE reform and the future of housing finance in the U.S. Guest Speaker

Mr. Peter Wallison Peter J. Wallison holds the Arthur F. Burns Chair in Financial Market Studies and is co-director of American Enterprise Institute's ("AEI") program on financial market deregulation. Prior to joining AEI, he practiced banking, corporate, and financial law at Gibson, Dunn & Crutcher in Washington, D.C., and New York. Mr. Wallison has held a number of government positions. From June 1981 to January 1985, he was general counsel of the United States Treasury Department, where he had a significant role in the development of the Reagan administration’s proposals for deregulation in the financial services industry, served as general counsel to the Depository Institutions Deregulation Committee, and participated in the Treasury Department’s efforts to deal with the debt held by less-developed countries. During 1986 and 1987, Mr. Wallison was White House counsel to President Ronald Reagan. Between 1972 and 1976, Mr. Wallison served first as special assistant to New York’s Gov. Nelson A.

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Rockefeller and, subsequently, as counsel to Mr. Rockefeller when he was vice president of the United States. Fannie and Freddie Pre-Crisis

*Financial Crisis Inquiry Commission, “Government Sponsored Enterprises and the Financial Crisis,” Preliminary Staff Report, April 7, 2010 (pp. 1-22). Acharya, V., Richardson, M. & van Nieuwerburgh, S., Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance, Princeton University Press, January 2011 (pp. 88- 100). Financial Crisis, Insolvency and Conservatorship

*Financial Crisis Inquiry Commission, “Government Sponsored Enterprises and the Financial Crisis,” Preliminary Staff Report, April 7, 2010 (pp. 22-28). *Wallison, P., “A crisis caused by housing policies, not lack of regulation,” American Enterprise Institute, October 30, 2017 (pp. 1-3). *Wallison, P. & Pinto, E., “Worse Than You Think: What Went Wrong at Fannie and Freddie And What Still Might,” American Enterprise Institute, November 3, 2008 (pp. 1-4). *Isaac, W., “Playing Semantic Games With Fannie and Freddie Investors,” The Wall Street Journal, July 6, 2014 (pp.1-2). *Calabria, M., “The Future of Fannie And Freddie,” Panel Contribution at Brooklyn Law School, April, 2015 (pp. 354-356). *Wallison, Peter, “Hidden in Plain Sight: A Q&A with Peter Wallison on the 2008 Financial Crisis and Why It Might Happen Again,” American Enterprise Institute, January 13, 2015. *Hoskins, S., “Freddie Mac Announces Quarterly Loss, Does Not Require Additional Treasury Assistance,” Congressional Research Service Report, November 6, 2015 (pp.4). Future of GSEs and GSE Regulation

*Light, J., “Fannie-Freddie Reform Won't Happen Until 2018, Mnuchin Says,” Bloomberg, September 14, 2017 (pp. 1-2). *Wallison, P., “Hidden in Plain Sight: A Q&A with Peter Wallison on the 2008

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financial crisis and why it might happen again,” AEI interview, January 13, 2015 (pp.1-6). *Ramirez, K., “Mark Calabria: Trump administration "committed" to ending conservatorship,” HousingWire, November 1, 2017 (pp. 1-2). *Powell, J., “The Case for Housing Finance Reform,” Board of Governors of the Federal Reserve System, July 6, 2017 (pp. 1-3).

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Class 9- Equity Market Structure March 28

In 2005 the SEC put in place Regulation NMS (National Market System) with the major focus on enhancing competition among market makers and exchanges through lowering barriers to entry. The regulation succeeded in spawning a host of new institutions (electronic exchanges, trading platforms, dark pools) and trading practices, such as computerized high speed trading. The consequence of these changes has been increased competition, with the attendant benefits of reduced transaction costs, but this has been accompanied by dramatic fragmentation of market trading among competing execution venues. Further, the lowered transaction costs have encouraged the development of computerized trading systems, including “high frequency trading systems,” that have greatly expanded transaction volume. Some believe that the consequences of these changes have been reduced transparency of transactions and periods of dramatic price instability (the “Flash Crash” of May 2010). This class will focus on the evolution of market trading structure and practices, the implications for market stability, and the need for reforms of the rules that shape trading market structure. Guest Speaker

Mr. James Angel James Angel specializes in the structure and regulation of financial markets around the world, and he has visited over 50 financial exchanges around the world. His current research focuses on short selling and regulation. He teaches undergraduate, MBA, and executive courses, including Investments and Capital Markets. "Dr. Jim" has testified before Congress about issues relating to the design of financial markets. In addition, he has been quoted in hundreds of newspaper articles and has appeared numerous times on radio and television. Dr. Jim began his professional career as a rate engineer at Pacific Gas and Electric, where he worked on FERC and CPUC related issues. Along the way he has also worked at BARRA (later part of Morgan Stanley) where he developed equity risk models. He has also served as a Visiting Academic Fellow in residence at the National Association of Securities Dealers (NASD – now FINRA) and also as a visiting economist at the Shanghai Stock Exchange. He has also been chairman of the Nasdaq Economic Advisory Board, a member of the OTC Bulletin Board Advisory Committee, and has served on the board of directors of the Direct Edge Stock Exchanges (later part of BATS Global Markets). From 2012-2014 he was a visiting associate professor at the Wharton School of the University of Pennsylvania. Overview – Market Structure

* U.S. Department of the Treasury, “A Financial System That Creates Economic

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Opportunities: Capital Markets,” Report, October 2017 (pp. 13-18). *Committee on Capital Markets Regulation, “The State of the U.S. Equity Markets,” September 2017 (pp. 1-6). Dark Pools

*Shorter, G., et al, “Dark Pools in Equity Trading: Policy Concerns and Recent Developments,” Congressional Research Service, September 2014 (pp.1-13) *Hadfield, W., “Dark Pool Traders Look to Stay in the Shadows,” Bloomberg, July 10, 2017 (pp. 1-5). High Frequency Trading and Algorithms

*Committee on Capital Markets Regulation, “What is High Frequency Trading?,” December 29, 2014 (pp. 1-9). *Menkveld, A., “The Economics of High-Frequency Trading: Taking Stock,” Annual Review of Financial Economics, September 8, 2016 (pp. 1-20). Khalique, F., “Regulators Struggle to Get to Grips with High Frequency Trading,” Global Risk Regulator, December 2016 (pp. 10-11). *Rennison, J. “US Treasury Clearing House Eyes HFT Access,” Financial Times, May 24, 2016 (pp. 1-3). *Fairless, T., “German Bundesbank: High-Frequency Trading Can Worsen ‘Flash Crashes,’” Wall Street Journal, October 24, 2016 (pp.1-2). *O’Hara, M., “High Frequency Market Microstructure,” April 2015 (pp.17-31) *Scott, H., Testimony before the Subcommittee on Securities, Insurance, and Investment Committee on Banking, Housing, and Urban Affairs, U.S. Senate, June 18, 2014 (pp.3-17). *Marra, S., “Dynamic Volatility Targeting,” Lazard, September 14, 2017 (pp. 5-7). Meyer, G., “How high-frequency trading hit a speed bump,” Financial Times, January 1, 2018 (pp. 1-8). Speed Bumps

Securities and Exchange Commission, “Order Approving Proposed Rule Change Amending Rules 7.29E and 1.1E to Provide for a Delay Mechanism,” May 16, 2017 (pp. 1-3). *Bell, H., “Who Benefits from Market Speed Bumps? The Exchanges,” New York

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Times, December 23, 2016 (pp.1-5). *Osipovich, A., “A Nasdaq Speed Upgrade is Threatening IEX,” Wall Street Journal, October 20, 2016 (pp.1-4). Decimalization and Tick Sizes

*Securities and Exchange Commission, “Report to Congress on Decimalization,” July 2012 (pp. 1-23). *Securities and Exchange Commission, “SEC announces Pilot Plan to Assess Stock Market Tick Size Impact for Smaller Companies,” Press Release, August 26, 2014 (p.1). *J.P. Morgan, “The Tick Size Pilot Plan: One Month In,” November 8, 2016 (pp. 2-3). * U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Capital Markets,” Report, October 2017 (pp. 59-61). Data Fees

*Wigglesworth, R., & Bullock, N, “Costly Data Battle Heats Up Between Traders and Equity Exchanges,” Financial Times, July 5, 2016 (pp. 1-4) *Ramsay, J., “Shining a Light on Market Data Costs,” June 21, 2017 (pp.1-5). *Committee on Capital Markets, “The U.S. Equity Markets: A Plan for Regulatory Reform,” July 2016 (pp. 145-149). Consolidated Audit Trail

Securities and Exchange Commission, “Summary Abrogation of CAT NMS Plan, Amendment 2, Release No. 34-81189; File No. 4-698,” July 21, 2017 (pp. 1-5). Scott, H, & Gulliver, J., “The SEC Plans to Collect Too Much Information,” Wall Street Journal, October 2, 2017 (pp. 1-3). Bond Markets

*Sindreu, J., “In the New Bond Market, Bigger is Better,” Wall Street Journal, June 21, 2017 (pp.1-4). Shareholders

Bebchuk, L., & Kastiel, K., “Small-Minority Shareholders in Control,” October 24, 2017 (pp. 1-3).

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*Lund, D., “The Case for Nonvoting Stock,” Wall Street Journal, September 5, 2017 (pp. 1-3). Other Market Structure Issues

Osipovich, A., & Berman, D., “Silicon Valley vs. Wall Street: Can the New Long-Term Stock Exchange Disrupt Capitalism?,” Wall Street Journal, October 16, 2017 (pp. 1-5). Osipovich, A., “Startup Exchange Cleared to Take on NYSE, Nasdaq for Stock Listings,” Wall Street Journal, October 26, 2017 (pp. 1-4). Osipovich, A., “Nasdaq Looks to Ease Rules for Blank-Check IPOs,” Wall Street Journal, August 31, 2017 (pp. 1-2).

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Class 10- Shadow Banking

April 6 3:15-5:15 pm

The Shadow Banking System, which includes non-bank financial institutions that provide many of the services of banks but are not directly regulated as banks, is viewed by many as contributing importantly to the 2007-08 financial crisis. Prominent Shadow Banking institutions include investment banks, special investment vehicles (generally affiliates subsidiaries of banks) insurance companies, hedge funds and money market funds. Dodd-Frank empowers the Financial Stability Oversight Council (FSOC) to extend bank regulatory oversight to selected Shadow Bank institutions that are “systemically important” to financial market stability (SIFIs). Three insurance companies have been designated as SIFIs and FSOC has considered designation of certain asset management companies as SIFIs. The SEC has recently adopted new rules to address risks of investor runs in money market funds. The class will focus on the threats to financial stability posed by the Shadow Banking System and regulatory policies to deal with these threats. Guest Speaker

Mr. Piwowar Michael S. Piwowar was first appointed to the U.S. Securities and Exchange Commission (SEC) by President Barack Obama and was sworn in on August 15, 2013. Dr. Piwowar was designated Acting Chairman of the Commission by President Donald Trump from January 23, 2017, to May 4, 2017. Previously, Dr. Piwowar was the Republican chief economist for the U.S. Senate Committee on Banking, Housing, and Urban Affairs under Senators Mike Crapo (R-ID) and Richard Shelby (R-AL). He was the lead Republican economist on the four SEC-related titles of the Dodd-Frank Act and the JOBS Act. Dr. Piwowar also worked on a number of important SEC-related oversight issues under the jurisdiction of the Committee, such as securities, over-the-counter derivatives, investor protection, market structure, and capital formation. During the financial crisis and its immediate aftermath, Dr. Piwowar served in a one-year fixed-term position at the White House as a senior economist at the President’s Council of Economic Advisers (CEA) in both the George W. Bush and Barack Obama Administrations. While at the CEA, Dr. Piwowar also served as a staff economist for the Financial Regulatory Reform Working Group of the President’s Economic Recovery Advisory Board. Before joining the White House, Dr. Piwowar worked as a Principal at the Securities Litigation and Consulting Group (SLCG). At SLCG, he provided economic consulting to law firms involved in complex securities litigation and

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technical assistance on market structure, regulatory policy, and risk management issues to domestic and international securities regulators and market participants. Dr. Piwowar’s first tenure at the SEC was in the Office of Economic Analysis (now called the Division of Economic and Risk Analysis) as a visiting academic scholar on leave from Iowa State University and as a senior financial economist. In those roles, he provided economic analyses and other technical support to the Commission and other SEC Divisions and Offices on a wide range of rulemaking, compliance, and enforcement matters. Dr. Piwowar was an assistant professor of finance at Iowa State University where he focused his research on market microstructure and taught undergraduate and graduate courses in corporate finance and investments. He published a number of articles in leading academic publications and received several teaching and research awards. Dr. Piwowar received a B.A. in Foreign Service and International Politics from the Pennsylvania State University, an M.B.A. from Georgetown University, and a Ph.D. in Finance from the Pennsylvania State University. Regulation of Money Market Funds

*Securities Exchange Commission, “SEC Adopts Money Market Fund Reform Rules,” Press release, July 23, 2014 (pp.1-8). *Chen, C., Cipriani, M., & La Spada, G., “Money Market Funds and the new SEC Regulation,” Liberty Street Economics, March 20, 2017 (pp. 1-5). *Alexander, P., “Council of the EU set to Agree on Money Market Fund Reform,” Risk.net, June 14, 2016 (pp. 1-3). *Scott, H., Connectedness and Contagion, 2016 (pp.223-230). *Scott, H. & Gulliver, J., “This Proposed Investing Rule Would be a ‘Dangerous Mistake,’” CNBC, October 14, 2016 (pp. 1-2). Ferrell, A., & Morley, J., “New Special Study of the Securities Markets: Institutional Intermediaries,” July 18, 2017 (pp. 1-64). Shadow Banking System / “Market Based Finance”

*Financial Stability Board, “Global Shadow Banking Monitoring Report 2016,” May 10, 2017 (pp. 1-9). * U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Asset Management and Insurance,” Report, October 2017 (pp.

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63). *Stafford, P., “Global Regulators Say ‘Shadow Banking’ Market Has Been Tamed,” Financial Times, July 3, 2017 (pp. 1-2). *Alnahedh, S., & Bhagatm S., “Shadow Banking Concerns: The Case of Money Market Funds,” 2017 (pp. 1-8). Committee on Capital Markets, “Common Ownership and Antitrust Concerns,” November 2017 (pp. 1-14). Tarullo, D., “Thinking Critically about Nonbank Financial Intermediation,” Remarks at the Brookings Institution, Washington , D.C., November 17, 2015 (pp.1-14). Blackrock, “Who Owns the Assets? Developing a Better Understanding of the Flow of Assets and the Implications for Financial Regulation,” Viewpoint, May 2014 (pp.1-13). *Office of Financial Research, “Asset Management and Financial Stability,” September 2013 (pp.1-2, 9-12 – required, 12-23 – optional). *Wallison, P., “Unrisky Business: Asset Management Cannot Create Systemic Risk,” American Enterprise Institute, January 2014 (pp.1-7). *Financial Stability Oversight Council, “Basis for FSOC’s Final Determination Regarding Prudential Financial, Inc.,” September 19, 2013 (pp. 1-6). *Wallison, P., “MetLife Calls The Regulator’s Bluff,” Wall Street Journal, July 7, 2015 (pp.1-2). Financial Crisis Inquiry Commission, “Shadow Banking and the Financial Crisis,” Preliminary Staff Report, May 4, 2010 (pp. 1-41). MiFID II

*Securities and Exchange Commission, “SEC Announces Measures to Facilitate Cross-Border Implementation of the European Union’s MiFID II’s Research Provisions,” October 26, 2017 (pp. 1-2) *Michaels, D., “Wall Street Skirts Worst Fallout From EU Law Shaking Up Analyst Research,” Wall Street Journal, October 26, 2017 (pp. 1-3). Jackson, H., Rady, J., & Zhang, J., “ ‘Nobody is Proud of Soft Dollars’: A Critical Review of Excess Brokerage Commissions in the United States and the Likely Impact of Pending MiFID II Reforms in the European Union,” June 21, 2017 (pp. 1-15).

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SIFI Designation of Non-Banks

* U.S. Department of the Treasury, “Financial Stability Oversight Council Designations,” November 17, 2017 (pp. 9-14 required, pp. 16-36 optional). * U.S. Department of the Treasury, “Financial Stability Oversight Council: Nonbank Financial Company Designations List” October 2, 2017 (pp. 1-2). *Elliott, D., “Designating Systemically Important Financial Institutions: Balancing Costs and Benefit,” Testimony before the House Financial Services Subcommittee, May 16, 2012 (pp.1-4). Vanguard, “The SIFI Search: Some Dangerous Misconceptions about Mutual Funds,” April 2017 (pp. 1-10). Financial Stability Board, “Assessment Methodologies for Identifying Non-Bank

Non-Insurer Global Systemically Important Financial Institutions,” 2nd

Consultative Document, March 4, 2015 (pp.47-55). *Jopson, B., et al, “Fund Managers To Escape ‘Systemic’ Label,” Financial Times, July 14, 2015 (pp.1-2) *Committee on Capital Markets Regulation, Comment letter on Consultative Document of Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions, May 29, 2015 (pp.1-6).

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Class 11- Regulatory Structure April 11

This class focuses on the structure of the U.S. financial regulatory system, which is the most fragmented and complex of all developed economies. There are competing regulators at the federal, state and private (“self-regulatory organizations”) levels, as well as competition among regulators at the various levels. The 2010 Dodd-Frank Act did very little to reduce this regulatory fragmentation, eliminating only one regulator and adding several additional new regulatory bodies, such as FSOC, to an already complicated system. We will start from the Treasury Blueprint issued in 2008, compare it with other alternatives also not adopted, compare it with what was incorporated into the Dodd-Frank legislation and ask why Congress made the choices it did. We will then move on to discuss what improvements could be made and public policy that might move us there. Regulatory Structure

*Committee on Capital Markets Regulation, “Roadmap for Regulatory Reform,” May 2017 (pp. 4-38). * U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions,” Report, June 12, 2017 (pp. 24-31). *Department of the Treasury, “Blueprint for a Modernized Financial Regulatory Structure,” March, 2008 (pp. 1-22). *Committee on Capital Markets Regulation, “Recommendations for Reorganizing U.S. Regulatory Structure,” January 14, 2009 (pp. 1-10). *Taylor, M., “The Road From "Twin Peaks" ― And The Way Back,” Connecticut Insurance Law Journal, Volume 16:1, 2009 (pp. 61-65,75-95). *The Volcker Alliance, “Reshaping The Financial Regulatory System,” April, 2015 (pp.12-28 required, 29-37 optional). *Norris, F., Independent Agencies, Sometimes in Name Only, New York Times, August 8, 2013 (pp. 1-3). *Hilsenrath, J., “Washington Strips New York Fed’s Power,” The Wall Street Journal, March 4, 2015 (pp.1-8). *Clifford Chance, “A Brief Overview of the Financial Services Act 2012 and the New UK Financial Regulation Framework,” Briefing Note, March 2013 (pp. 1-4). *Blackwell, R., “The Bank Regulatory System’s a Nightmare, and It’s Not Going to Change,” American Banker, August 5, 2014 (pp.1-4).

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Scott, H., “The Reduction of Systemic Risk in the United States Financial System,” Harvard Journal of Law and Public Policy, Volume 33, No. 22, 2010 (pp. 726-734). Bipartisan Policy Center, “Dodd-Frank’s Missed Opportunity: A Road Map for a More Effective Regulatory Architecture,” April 2014 (pp.5-10). Pinschmidt, P., “Testimony before the House Financial Services Subcommittee on Oversight and Investigations,” 17 September 2014 (pp.1-5). Piwowar, S., “Remarks at AEI Conference on Financial Stability,” July 15, 2014 (pp1-4). *Gallagher, D., “The Securities and Exchange Commission – The Next 80 Years,”

The 15th Annual A.A. Sommer Jr Lecture on Corporate, Securities and Financial Law, October 16, 2014 (pp.1-5). *Tucker, P., “Regulatory Reform, Stability and Central Banking,” Hutchins Center on Fiscal & Monetary Policy, Brookings, January 16, 2014 (pp.13-17).

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Class 12– Cost Benefit Analysis

April 18

Cost-Benefit analysis is generally included in a list of characteristics of effective regulation – whether the benefits of regulatory intervention outweigh the costs. Such analysis has been enshrined by Executive Order since the 1980s in the analysis of regulations proposed by agencies of the Executive Branch in the U.S. For many years, the independent agencies, not covered by the Executive Order, paid manly lip-service to Cost-Benefit analysis. But in the late 1990s, Congressional legislation required the SEC to perform such analysis, although the requirement attracted little attention at the time. In the last several years, federal court decisions have mandated that the CFTC and SEC conduct a serious Cost-Benefit analysis of newly proposed rules. The class will discuss the challenges to execute Cost-Benefit analysis. Cost-Benefit Analysis

*Committee on Capital Markets Regulation, “A Balanced Approach to Cost-Benefit Analysis Reform,” October 1, 2013 (pp. 1-19). *Coates, J., “Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications,” Yale Law Journal, Volume 124, No. 4, January – February 2015 (pp. 885-889, 995-1011). *Perkins, D., & Carey, M., “Cost-Benefit Analysis and Financial Regulator Rulemaking,” Congressional Research Service, April 12, 2017 (pp. 12-17). *Committee on Capital Markets Regulation, “CCMR Warns that Inadequate Cost-Benefit Analysis Opens Dodd-Frank Regulation to Challenge and Delay,” March 7, 2012 (pp. 1-6). * U.S. Department of the Treasury, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions,” Report, June 12, 2017 (pp. 62-63). *Rose, P. & Walker, C., “The Importance of Cost-Benefit Analysis in Financial Regulation,” Center for Capital Markets Competitiveness, March 2013 (pp. v.-24). *Rose, P. & Walker, C., “Dodd-Frank Regulators, Cost-Benefit Analysis, and Agency Capture,” Stanford Law Review Online, Volume 66, No. 9, April 2013 (pp. 9-16). *Tett, G., “Beware the Hegelian Touch of Regulatory Hubris,” Financial Times, September 14, 2011 (pp. 1-2). *Kess, A. and Cohn, Y., “Playing the Dodd-Frank Shaming Game,” The Wall

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Street Journal, December 2, 2014 (pp.1-2). *Blinder, A., “Financial Entropy and the Optimality of Over-Regulation,” the 17th Annual International Banking Conference, November 6, 2014 (pp.17-21). *Levitt, A., “Don’t Gut the S.E.C.,” New York Times, August 7, 2011 (pp. 1-2). *Sloan, S., “Cost-Benefit Analysis Puts the Brakes on Dodd-Frank,” Bloomberg, May 7, 2012 (pp. 1-4). *Tett, G., “Regulatory Revenge Risks Scaring Investors Away,” Financial Times, August 28, 2014 (pp.1-2). Posner, E. and Weyl, G., “Cost-Benefit Analysis of Financial Regulations: A Response to Criticisms,” Coase-Sandor Institute for Law and Economics Working Paper No. 683, University of Chicago Law School, May 2014, pp.1-13. Elliott, D., Salloy, S. & Oliveira Santos, A., “Assessing the Cost of Financial Regulation,” IMF Working Paper, #12/233, September 2012 (p. 4-19, 67-68). Min, D., “The Costs of Implementing the Dodd-Frank Act: Budgetary and Economic,” Testimony before Subcommittee on Oversight and Investigations of the House Financial Services Committee, U.S. House of Representatives, March 30, 2011 (pp. 1-7). Overdahl, J., “Economic Analysis in the Federal Rule-Making Process to Implement Dodd Frank,” NERA Economic Consulting, Insights Series, August 30, 2010 (pp. 1-5). *Cochrane, J., “Challenges for Cost-Benefit Analysis of Financial Regulation,” August 2014 (pp.23-31). Commodity Futures Trading Commission, “Initial Response to District Court Order in Securities Industry and Financial Markets Association v. CFTC,” March 10, 2015 (pp.1-4).