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Surcharges and Circuit Breakers Make Regulatory Strides

Motivated by years of recession or a few terrifying minutes of market depression, last week was exciting for remedial action by regulatory authorities. Large financial institutions are looking at higher capital reserves, and traders are more likely than ever to see older circuit breaker rules give way to new ones.

Cash or Surcharge?

The world’s top banks will have to keep as much as 2.5 percent in extra capital to help endure another financial crisis, according to finalized surcharge plans by the Basel Committee on Banking Supervision. The committee announced its solidified plan last week after a two-day meeting, though banking groups in Europe protest on the grounds that these surcharges for tomorrow could impair the financial recovery today.

The plan would still call for financial institutions to maintain a core equity buffer between 1 to 2.5 percent against further catastrophe. What may change would be how authorities decide where individual banks would fall on that buffer spectrum.

The extra capital buffer is part of broader endeavors avoid future taxpayer-funded bailouts a la the “too-big-to-fail” banks in 2008. Financial institutions would hold this surcharge in addition to new 7-percent minimum capital levels implemented from 2013 to 2018, also under Basel III.

The additional surcharge is “anti-American,” according to JPMorgan Chase & Co. CEO Jamie Dimon. Though the Financial Times  last week called Dimon “a charismatic rebel leader,” experts cited by Reuters predict the G20 will approve the extra capital requirements next month.

Breaking for Circuit Breakers

In Flash Crash-inspired news from last week, SIFMA gave a nod to new SEC proposals for circuit breakers. Regulators developed the recently released measures in response to that infamous day in May 2010.

“Today’s newest proposals from regulators and the exchanges are a further step in the right direction toward strengthening our markets and modernizing the rules that govern them,” said Randy Snook, executive vice president of the Securities Industry and Financial Markets Association. “Updating system-wide circuit breakers to work more appropriately in today’s trading environment is critical, as none of them were triggered by the events of May 6.”

The broader rules would supersede circuit breakers that have tripped on only one occasion since their 1988 implementation. Circuit breakers have been the subject of great controversy over their effectiveness in a stand-alone capacity, as well as compared to “limit up-limit down” measures.


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