The $13 billion penalty levied by the Justice Department and other officials against JPMorgan for its “serious misrepresentation” in the packaging of residential mortgage-backed securities is a clarion call for financial services firms that law enforcement and regulators are on high alert for RMBS-related fraud. The JPMorgan case is also a harbinger of more to come. While no individuals at JPMorgan were named, Justice Department officials have stated that the “settlement does not absolve JPMorgan or its employees from facing any possible criminal charges.” In addition, the agreement does not let JPMorgan or individuals off the hook for civil charges and requires the firm to cooperate in any future investigations related to RMBS fraud.
The driver behind this unprecedented settlement, which encompasses federal and state civil claims against JPMorgan, Bear Stearns and Washington Mutual for RMBS instruments created before Jan. 1, 2009, is the RMBS Working Group.
The working group is a combination of: federal and state law enforcement officials; 10 U.S. attorney’s offices; the FBI; the SEC; the Department of Housing and Urban Development (HUD); HUD’s Office of Inspector General; the FHFA-OIG; the Office of the Special Inspector General for the Troubled Asset Relief Program; the Federal Reserve Board’s Office of Inspector General; the Recovery Accountability and Transparency Board; the Financial Crimes Enforcement Network; and more than 10 state attorneys general offices.
With so many officials involved, the government cannot claim to have inadequate staffing to take on RMBS fraud. It’s pure conjecture on my part, but I would not be surprised that the group has a good working relationship with Mary Jo White, the new SEC chair. White, as you may recall, served as the U.S. Attorney for the Southern District of New York from 1993 to 2002.
White is also looking to derivatives trading issues beyond RMBS fraud. She is showing new signs of cooperation with the CFTC via the nomination of Timothy Massad, overseer of the Troubled Asset Relief Program (TARP) as the next chairman of the CFTC. On Nov. 12, White issued the following statement: “Tim has done a superb job at Treasury and is an excellent choice to lead the CFTC. He is smart, high-minded, and has extensive knowledge of derivatives — how they work and the risks they can carry. I very much look forward to working with him as a fellow regulator.”
Of course, trying to read into the public remarks of most Wall Street’s regulators is difficult because they are as secretive as the firms they oversee, if not more so.
Aside from regulating derivatives, White has also indicated that the SEC is beginning to grasp the importance of financial technology at least when it comes to exchanges and electronic trading venues.
White declared at Sifma’s Annual Meeting last week that the objective of the SEC is “zero tolerance” for the IT operations mishaps that have plagued trading venues such as Nasdaq, which had a widely publicized securities trading interruption on August 22. “We have to focus on what do you do, when you have an incident,” White said at the Sifma event. In addition to setting the bar “very high” for the performance of exchanges, White said that there is likely to be “a comprehensive discussion” about the future roles of self-regulating organizations.
That conversation probably began in September when White met with equities and options exchanges, FINRA, DTCC, and the Options Clearing Corp. about market infrastructure issues. Those in attendance and other market participants were asked to provide:
Action plans to address the standards for “highly resilient and robust systems for the securities information processors (SIPs)” that include testing standards and disclosure protocols;Assessments of the robustness and resilience of other critical infrastructure systems;And SIP plans and/or rule amendments addressing the issuance, effectiveness, and communication of regulatory halts.
Exchanges and other trading venues were also instructed to review rules relating to trade breaks and procedures to reopen trading after a trading halt. They were also asked to provide amendments to those rules as needed, including “kill switch” changes for shutting down trading during IT failures. They will also have to consider other means of risk mitigation.
So, as we enter the next phase in the Regulatory Renaissance, it’s important to note that the regulators need to evolve along with the industry.
In particular, how much longer can regulators be allowed to move the goal post for regulatory deadlines hours before the deadlines were supposed to go into effect?
Financial technology vendors, among others, are under great pressure to meet regulatory deadlines for their customers so an eleventh hour decision by regulators to reset their deadlines can result in huge losses for service and solution providers.
For financial services firms, it can mean a sudden and significant reallocation of resources and a shifting of budgets.
While one of the more painful issues, the shifting deadlines isn’t only the problem on the horizon. Has anyone heard of the Volcker Rule?
Yet I am holding out hope that with more engaged regulators the industry stands a better chance of being heard.
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