Additionally, in August 2023 federal banking regulators issued a joint proposal that would require large banking organizations with more than $100 billion in total consolidated assets to issue and maintain minimum amounts of long-term debt. It is estimated that covered organizations would need to issue approximately $70 billion of new long-term debt over a three-year phase-in period.
Under the proposal, large banks would be required to maintain a minimum amount of eligible long-term debt equal to the greater of 6% of risk-weighted assets, 3.5% of average total consolidated assets and, for banks subject to the supplementary leverage ratio, 2.5% of total leverage exposure under said ratio.
The US Financial Stability Oversight Council (FSOC) issued final versions of a new analytic framework for financial stability risks and updated guidance on the Council’s nonbank financial company determinations process. The new framework offers a detailed public explanation of how the Council monitors, assesses, and responds to potential risks to financial stability. It also explains the range of authorities the Council may use to address any particular risk – including interagency coordination, recommendations to regulators, or the designation of certain entities.
Markets and trading
In December 2022, the Securities and Exchange Commission (SEC) released a package of equity market structure proposals designed to increase transparency and competition in US capital markets. Specifically, the SEC is seeking to: update the order execution and routing disclosures required under Rule 605; adopt variable tick sizes and lower access fees under Regulation NMS; implement a best execution framework for broker-dealers and other intermediaries through a new commission rule; and increase order-by-order competition for retail orders through the creation of an open auction mechanism.
While simultaneous adoption of interconnected reforms has been a point of contention for various industry participants and members of Congress, the Office of Management and Budget’s unified regulatory agenda suggests adoption in April 2024.
The SEC’s proposed amendments to the definition of an “exchange” under Rule 3b-16 remains a priority of Chair Gensler, who highlighted the proposal’s impacts on both US Treasury and DeFi markets in his September 2023 testimony before the House Committee on Financial Services. Similar to the Commission’s NMS proposals, adoption is planned in April 2024.
Relatedly, the SEC recently adopted several initiatives, including rules to enhance risk management practices for central counterparties in the US Treasury market and facilitate additional clearing of US Treasury securities transactions, rules on security-based swap execution facilities and clearing agency governance, and a rule on conflicts of interest in certain securitizations.
Finally, in October 2023 the SEC granted exemptive relief to broker-dealers transacting fixed-income securities under Rule 144A’s safe harbor provision. Issuers of fixed income securities can now rely on Rule 144A and not be subject to detailed disclosure requirements under Rule 15c2-11.
Digital finance
In July of 2023, the SEC issued a proposed rule to address conflicts of interest associated with the use of predictive data analytics and similar technologies, including AI, by broker dealers and investment advisers when interacting with investors. The proposal utilizes a broad definition of “covered technology” that potentially covers a range of applications beyond predictive analytics, including basic financial modeling tools. While this is the first rulemaking initiative to address AI, following the issuance of an Executive Order on AI by President Biden, further rulemaking and requests for information from a variety of agencies across the government are likely to follow through 2024 and beyond as the technology continues to develop.
As far as focus in Washington is concerned, AI will be the dominant technology issue, with a bipartisan recognition of the need for thoughtful regulation. Congress, the president and federal agencies have all taken steps toward addressing this important and still-emerging issue, including introducing legislation.
In the crypto space, after much anticipation and a social media mishap, the SEC in a 3-2 vote approved exchange-traded funds which invest directly in Bitcoin. In his statement announcing the decision, Chair Gary Gensler noted that the ruling of the US Court of Appeals for the District of Columbia in the case regarding Grayscale’s proposed ETP, namely that the Commission failed to properly explain its reasoning for denying the application, was behind the Commission’s decision to approve spot bitcoin ETPs. The Chair reiterated his position that the majority of crypto assets are investment contracts, and thereby subject to federal securities laws. The Chair also highlighted the investor protection mechanisms contained in the approval order, specifically: required investor disclosures, limiting the trading of these products to national securities exchanges, and “applying existing rules and standards of conduct to the purchase and sale of approved ETPs”. It would not be surprising to see additional approvals in 2024.
Despite the approval of spot bitcoin ETFs, following its enforcement actions against Coinbase and Binance in 2023, the SEC is expected to continue pursuing enforcement cases in the crypto-asset space into 2024.
While legislative momentum had been building in the crypto space in 2023, with several bills being introduced to regulate cryptocurrencies, ultimately none of them passed. Comprehensive cryptocurrency legislation is not currently a priority in Congress, and with the retirement of Rep. Patrick McHenry (R) North Carolina, who had served as Chair of the House Financial Services Committee and was a staunch supporter of digital assets, the path for legislation moving through the House of Representatives has become less clear.
Green finance
In the US, efforts to address climate-related financial risks continue. In October 2023, California passed legislation requiring large companies to disclose climate-related financial risks and report greenhouse gas emissions, including Scope 3 emissions. New York is currently considering a similar bill.
The SEC’s expansion of the Names Rule became effective in December 2023. To combat greenwashing concerns, registered funds are required to adopt an 80% investment policy if their names suggest a focus on investments that have particular characteristics, including “growth” and “value,” or incorporate ESG factors. Compliance is set to begin in the next 24-30 months.
In the near future, the SEC is also expected to finalize a proposal that would require public companies to make certain climate-related disclosures, as well as a proposal that would require investment companies and advisers that consider ESG factors to disclose additional information to investors about their strategies.
Following its second voluntary carbon markets convening, the Commodity Futures Trading Commission (CFTC) issued a proposed guidance on the listing of voluntary carbon credit (VCC) derivatives contracts that outlines how designated contract markets (DCMs) may list VCC derivative contracts while complying with statutory requirements of the Commodity Exchange Act and applicable CFTC rules and regulations.
Federal banking regulators (Fed, OCC and FDIC) jointly finalized principles that provide a high-level framework for the management of exposures to climate-related financial risks for large financial institutions. Earlier in the year, the Federal Reserve conducted a pilot climate scenario analysis of the six largest US banks for physical and transition risks related to climate change on specific assets in their portfolios with an aggregate-level report of the findings to be published once analysis has been completed.
