A Shot at Regulating Securitization

In order to incentivize stronger issuer due diligence effort, European and U.S. authorities are amending securitization-related regulations to force issuers to retain an economic interest in the securitization products they issue. The idea is that if loan originators and securitizers have more skin in the game they will more diligently screen the loans they originate and securitize. This paper uses a simple model to explore the economics of equity and mezzanine tranche retention in the context of systemic risk, accounting frictions and reduced form informational asymmetries. It shows that screening levels are highest when the loan originating bank retains the equity tranche. However, most of the time a profit maximizing bank would favor retention of the less risky mezzanine tranche, thereby implying a suboptimal screening effort from a regulator's point of view. This is mainly due to lower capital charges, loan screening costs and lower retention levels. This distortion gets even more pronounced in case the economic outlook is positive or profitability is high, thereby making the case for dynamic and countercyclical credit risk retention requirements. Finally, the paper also illustrates the importance of loan screening costs for the retention decision and thereby shows that an unanimous imposition of equity tranche retention might run the risk of shutting down securitization markets.Securitization-related regulations; the economics of equity

Credit Derivatives

Credit derivatives are a useful tool for lenders who want to reduce their exposure to a particular borrower but are unwilling to sell their claims on that borrower. Without actually transferring ownership of the underlying assets, these contracts transfer risk from one counterparty to another. Commercial banks are the major participants in this growing market, using these transactions to diversify their portfolios of loans and other risky assets. The authors examine the size and workings of this relatively new market and discuss the potential of these transactions for distorting existing incentives for risk management and risk monitoring.

New Financial Instruments for Managing Longevity Risk

Reduced returns and longevity risk are making it challenging for employers to offer defined benefit pensions. In countries with large defined benefit pension plan sectors, sponsors are transferring these obligations, and the associated investment and longevity risk, to life (re)insurers via buy-outs, buy-ins, and longevity swaps. Nevertheless, to date, there has been no successful longevity bond issuance, although there have been several false starts. This contrasts with the active market for catastrophe bonds that transfer risk associated with catastrophic events from (re)insurers to capital markets. This paper reviews catastrophe bond and other insurance risk transfer market developments, to identify the factors and design features that have resulted in success and failure. Conclusions are informed by an extensive literature review and quantitative survey, plus discussions with market participants including public policy makers. We conclude with suggestions for product design features and public policies that might kick start vibrant longevity bond markets

The Federal Government’s Use of Interest Rate Swaps and Currency Swaps

Interest rate swaps and currency swaps are contracts in which counterparties agree to exchange cash flows according to a pre-arranged formula over a period of time. Since 1985, the federal government has been us-ing such swaps to manage its liabilities in a cost-effective and flexible manner. The authors outline the characteristics of swap agreements and the ways in which the government uses them. They show that the swap program has been cost-effective, estimating that past and projected savings exceed $500 million. The authors also discuss the methods that the government uses to monitor the counterparty credit risk associated with these transactions.

Partial diazoxide responsiveness in a neonate with hyperinsulinism due to homozygous ABCC8 mutation

We report a case of partial diazoxide responsiveness in a child with severe congenital hyperinsulinaemic hypoglycaemia (CHI) due to a homozygous ABCC8 mutation. A term baby, with birth weight 3.8 kg, born to consanguineous parents presented on day 1 of life with hypoglycaemia. Hypoglycaemia screen confirmed CHI. Diazoxide was commenced on day 7 due to ongoing elevated glucose requirements (15 mg/kg/min), but despite escalation to a maximum dose (15 mg/kg/day), intravenous (i.v.) glucose requirement remained high (13 mg/kg/min). Genetic testing demonstrated a homozygous ABCC8 splicing mutation (c.2041-1G>C), consistent with a diffuse form of CHI. Diazoxide treatment was therefore stopped and subcutaneous (s.c.) octreotide infusion commenced. Despite this, s.c. glucagon and i.v. glucose were required to prevent hypoglycaemia. A trial of sirolimus and near-total pancreatectomy were considered, however due to the significant morbidity potentially associated with these, a further trial of diazoxide was commenced at 1.5 months of age. At a dose of 10 mg/kg/day of diazoxide and 40 µg/kg/day of octreotide, both i.v. glucose and s.c. glucagon were stopped as normoglycaemia was achieved. CHI due to homozygous ABCC8 mutation poses management difficulties if the somatostatin analogue octreotide is insufficient to prevent hypoglycaemia. Diazoxide unresponsiveness is often thought to be a hallmark of recessively inherited ABCC8 mutations. This patient was initially thought to be non-responsive, but this case highlights that a further trial of diazoxide is warranted, where other available treatments are associated with significant risk of morbidity. Learning points: Homozygous ABCC8 mutations are commonly thought to cause diazoxide non-responsive hyperinsulinaemic hypoglycaemia. This case highlights that partial diazoxide responsiveness in homozygous ABCC8 mutations may be present. Trial of diazoxide treatment in combination with octreotide is warranted prior to considering alternative treatments, such as sirolimus or near-total pancreatectomy, which are associated with more significant side effects.This article is freely available via Open Access. Click on the Publisher's URL to access the full-text

A new multi-system disorder caused by the Gαs mutation p.F376V

Context The alpha-subunit of the stimulatory G-protein (Gαs) links numerous receptors to adenylyl cyclase. Gαs, encoded by GNAS, is expressed predominantly from the maternal allele in certain tissues. Thus, maternal heterozygous loss-of-function mutations cause hormonal resistance, as in pseudohypoparathyroidism type Ia, while somatic gain-of-function mutations cause hormone-independent endocrine stimulation, as in McCune-Albright Syndrome. Objective We here report two unrelated boys presenting with a new combination of clinical findings that suggest both gain and loss of Gαs function. Design, Setting Clinical features were studied and sequencing of GNAS was performed. Signaling capacities of wild-type and mutant-Gαs were determined in the presence of different G protein-coupled receptors (GPCRs) under basal and agonist-stimulated conditions. Results Both unrelated patients presented with unexplained hyponatremia in infancy, followed by severe early-onset gonadotrophin-independent precocious puberty and skeletal abnormalities. An identical heterozygous de novo variant (c.1136T>G; p.F376V) was found on the maternal GNAS allele, in both patients; this resulted in a clinical phenotype that differ from known Gαs-related diseases and suggested gain-of-function at the receptors for vasopressin (V2R) and lutropin (LHCGR), yet increased serum parathyroid hormone (PTH) concentrations indicative of impaired proximal tubular PTH1 receptor (PTH1R) function. In vitro studies demonstrated that Gαs-F376V enhanced ligand-independent signaling at the PTH1R, LHCGR and V2R and, at the same time, blunted ligand-dependent responses. Structural homology modeling suggested mutation-induced modifications at the C-terminal α5-helix of Gαs that are relevant for interaction with GPCRs and signal transduction. Conclusions The Gαs p.F376V mutation causes a previously unrecognized multi-system disorder

Too Big to Fail — U.S. Banks’ Regulatory Alchemy: Converting an Obscure Agency Footnote into an “At Will” Nullification of Dodd-Frank’s Regulation of the Multi-Trillion Dollar Financial Swaps Market

The multi-trillion-dollar market for, what was at that time wholly unregulated, over-the-counter derivatives (“swaps”) is widely viewed as a principal cause of the 2008 worldwide financial meltdown. The Dodd-Frank Act, signed into law on July 21, 2010, was expressly considered by Congress to be a remedy for this troublesome deregulatory problem. The legislation required the swaps market to comply with a host of business conduct and anti-competitive protections, including that the swaps market be fully transparent to U.S. financial regulators, collateralized, and capitalized. The statute also expressly provides that it would cover foreign subsidiaries of big U.S. financial institutions if their swaps trading could adversely impact the U.S. economy or represent the use of extraterritorial trades as an attempt to “evade” Dodd-Frank. In July 2013, the CFTC promulgated an 80-page, triple-columned, and single-spaced “guidance” implementing Dodd-Frank’s extraterritorial reach, i.e., that manner in which Dodd-Frank would apply to swaps transactions executed outside the United States. The key point of that guidance was that swaps trading within the “guaranteed” foreign subsidiaries of U.S. bank holding company swaps dealers were subject to all of Dodd-Frank’s swaps regulations wherever in the world those subsidiaries’ swaps were executed. At that time, the standardized industry swaps agreement contemplated that, inter alia, U.S. bank holding company swaps dealers’ foreign subsidiaries would be “guaranteed” by their corporate parent, as was true since 1992. In August 2013, without notifying the CFTC, the principal U.S. bank holding company swaps dealer trade association privately circulated to its members standard contractual language that would, for the first time, “deguarantee” their foreign subsidiaries. By relying only on the obscure footnote 563 of the CFTC guidance’s 662 footnotes, the trade association assured its swaps dealer members that the newly deguaranteed foreign subsidiaries could (if they so chose) no longer be subject to Dodd-Frank. As a result, it has been reported (and it also has been understood by many experts within the swaps industry) that a substantial portion of the U.S. swaps market has shifted from the large U.S. bank holding companies swaps dealers and their U.S. affiliates to their newly deguaranteed “foreign” subsidiaries, with the attendant claim by these huge big U.S. bank swaps dealers that Dodd-Frank swaps regulation would not apply to these transactions. The CFTC also soon discovered that these huge U.S. bank holding company swaps dealers were “arranging, negotiating, and executing” (“ANE”) these swaps in the United States with U.S. bank personnel and, only after execution in the U.S., were these swaps formally “assigned” to the U.S. banks’ newly “deguaranteed” foreign subsidiaries with the accompanying claim that these swaps, even though executed in the U.S., were not covered by Dodd-Frank. In October 2016, the CFTC proposed a rule that would have closed the “deguarantee” and “ANE” loopholes completely. However, because it usually takes at least a year to finalize a “proposed” rule, this proposed rule closing the loopholes in question was not finalized prior to the inauguration of President Trump. All indications are that it will never be finalized during a Trump Administration. Thus, in the shadow of the recent tenth anniversary of the Lehman failure, there is an understanding among many market regulators and swaps trading experts that large portions of the swaps market have moved from U.S. bank holding company swaps dealers and their U.S. affiliates to their newly deguaranteed foreign affiliates where Dodd- Frank swaps regulation is not being followed. However, what has not moved abroad is the very real obligation of the lender of last resort to rescue these U.S. swaps dealer bank holding companies if they fail because of poorly regulated swaps in their deguaranteed foreign subsidiaries, i.e., the U.S. taxpayer. While relief is unlikely to be forthcoming from the Trump Administration or the Republican-controlled Senate, some other means will have to be found to avert another multi-trillion-dollar bank bailout and/or a financial calamity caused by poorly regulated swaps on the books of big U.S. banks. This paper notes that the relevant statutory framework affords state attorneys general and state financial regulators the right to bring so-called “parens patriae” actions in federal district court to enforce, inter alia, Dodd- Frank on behalf of a state’s citizens. That kind of litigation to enforce the statute’s extraterritorial provisions is now badly needed